Over a year after the Supreme Court dismissed telecom major Vodafone’s petition challenging Indian tax authorities’ jurisdiction over its $11.2-billion acquisition of Hutchison Essar in 2007, UK Prime Minister Gordon Brown has written to Prime Minister Manmohan Singh warning that such tax treatment will affect India’s investment climate.
Brown’s missive follows a showcause notice by the income tax department to Vodafone in October 2009 — that was a step towards raising a tax demand on the firm for $1.7 billion on capital gains, and possibly even penalties with 18% annual interest since the transaction.
Vodafone had questioned the tax department’s jurisdiction over share transfer between two overseas companies — Hutchison International and CGP Investment, incorporated in the Cayman Islands—through which the shares were routed to Vodafone. A Bloomberg-UTV report said Brown told Singh in the letter that taxing cross-border deals such as the Vodafone one could create uncertainty for foreign investors and affect investment climate.
Bloomberg also reports that the Indian government has replied to Brown’s communiqué—pointing out that the matter is in court and no decision has been taken.
Vodafone had acquired a 52% stake in Hutch Essar and the tax department had served a 2,400 page-long show cause notice to the firm in October after a long-drawn out court battle over the department’s right to scrutinize the transaction details of the acquisition. In its notice, the department had asked the company why it should not be held that the Department has jurisdiction to proceed against it for the default of non-deduction of tax at source from the transaction.
A tax demand notice will be prepared on the basis of Vodafone’s response to the notice and experts believe it could take up to four years before Vodafone actually has to fork out the money as it would once again go through the entire judicial process against the demand notice.
Word of Caution by British PM