Vodafone faces tax billion in India from Hutchison Essar acquisition

15 January 2011 | Kavit Majithia


Vodafone, recognised by many as one of the first companies to realise India’s potential in the telecoms market, is facing a controversial tax bill which stems from its acquisition in 2007 of an $11 billion stake in India’s Hutchison Essar.

The $2 billion tax bill which Vodafone faces could damage India’s reputation


Three years after the purchase, the UK-based operator was charged $2 billion in Indian capital gains tax. Vodafone claims that it is not liable to pay the capital gains tax because it acquired the controlling stake from Hutchison of Hong Kong, and the acquisition was completed via a company in Holland. The complexity of the issue, Vodafone’s influential presence in the region and the company’s adamant stance has led to questions about how other international operators will approach investment in India.
 
Operating under the name Vodafone Essar, the company began operations in the country in 1994 after acquiring a licence in Mumbai, and now has over 118.5 million customers across the country. Vodafone acquired a 67% controlling stake in Hutchison Essar for $11 billion through Hutchison Whampoa of Hong Kong, that indirectly owned a controlling stake in the Indian subsidiary. The case has now been adjourned until July 2011. “There is no tax liability and all tax and legal advice remains consistent with this view,” said a Vodafone spokesperson.

“It is no surprise that Vodafone is contesting this bill,” says Gagandeep Kaur, India editor at Light Reading. “Considering that it has invested substantially in India over the years, it will look for support from Indian authorities. Amongst the country’s incumbent carriers, including Bharti airtel and Reliance Communications, this is the only offshore entity. Vodafone has gone on record to state this tax liability will affect future investment in India and the company is sure to be cautious when looking at offshore acquisitions in the future.”

2011 will prove to be a signicant year in India’s prominent telecoms sector. A broadband wireless spectrum auction in June 2010 raised approximately $8 billion for the government to increase broadband usage across the country. 3G will also be rolled out across India in 2011 following the completion of its 3G licence spectrum auction in May last year, with Vodafone securing 3G spectrum in nine circles, including the crucial regions of Mumbai and Delhi. Emeka Obiodu, senior analyst at Ovum, believes that even if Vodafone is forced to pay the capital gains tax, it is too committed in the region to divest its assets or risk losing out to rivals in the region: “Vodafone cannot walk away from its investments in India. It invested approximately $2.5 billion in 3G last year and if all avenues of appeal fail they will bite the bullet and pay up.”

India’s telecoms market has been rocked in recent months following the resignation of the Telecom Minister Andimuthu Raja, after India’s central bureau of investigation accused the country’s telecoms authority of awarding 2G licences to inexperienced, smaller market players (sometimes referred to as “greenfield operators”) in 2008, and subsequently making a prot when these licences were sold off to larger international players. The issue has “left a negative sentiment in the industry,” according to Kaur, but she believes it will not affect growth. “There is uncertainty as to whether the spectrum will be taken back from green field operators who acquired spectrum in 2008,” added Kaur.

Vodafone will not comment on the tax issue until mid-2011 when the Indian Supreme Court conducts its final hearing into the case. With the highest ARPU customers in the market and with signi cant investment in 3G, it is unlikely that Vodafone will risk not securing the highest market share in data. “We will continue to take whatever actions necessary to defend Vodafone’s position over this issue as the matter proceeds,” added the Vodafone spokesperson.


 

Tax issues elsewhere 

The Hungarian government has issued an extraordinary tax on the country’s telecoms operators, aiming to ease the national budget deficit by raising up to $302 million from the telecoms sector alone. Foreign operators, including Deutsche Telekom and Telenor will be included in the tax, which could severely affect investment plans in the region.