I-T dept hands Vodafone $2.5bn bill

Source:TNN, Oct 23, 2010, 05.57am IST


NEW DELHI: The I-T department on Friday slapped a tax demand of Rs 11,217.95 crore ($2.5 billion) on Vodafone International Holdings BV, treating it as a defaulter in the $11.07-billion deal to acquire Hutchison Telecommunication's stake in Hutchison Telecommunications India (HTIL).

The tax demand, which has been raised following the direction of Supreme Court on September 27, will have to be met within 30 days. Vodafone had challenged the Bombay High Court ruling that Indian income-tax authorities have jurisdiction to tax Vodafone in relation to the deal with Hutch. The Supreme Court had refused to stay the High Court order and asked the I-T department to raise the actual tax demand. The next hearing of the case is scheduled for October 25.

Vodafone, however, has contested the I-T department's claim. In a statement, the company said: "Vodafone strongly disagrees with the tax calculation released by the Indian tax office. Vodafone continues to believe that it is not liable for any tax on this transaction involving transfer of a company outside of India. Further, Vodafone was the acquirer and not the vendor and has made no gain in the transaction."

Under the provision of I-T department, an acquirer of stake in a company needs to collect the capital gains tax from the seller of the stake. In fact, under section 195 of the I-T Act, the buyer is obliged to deduct the tax liability of the seller from value of the deal. "If the buyer does not deduct the tax liability from the payment to the seller, he/she is liable to pay the tax under section 201(1)," a senior I-T official said. In this case, Hutch sold its stake in HTIL for $11.07 billion or around Rs 52,000 crore in 2007 and made huge profit. Capital gains tax is levied at the rate of 11.33% along with surcharge and education cess on non-listed securities. At 11.33%, a senior tax expert said, the tax liability would have been around Rs 5,600 crore. But, the department , he said, would also have levied penal interest on the amount to reach the figure of Rs 11,217.95 crore.

Vodafone argued that the entire deal was completed outside the country, therefore no tax liability can be fixed in India. In this case, Hutchison had sold its stake in the foreign-based holding company of HTIL to Vodafone's subsidiary companies registered overseas. But the tax department argued that the holding company, in which the stake was sold, had only business in India in the form of operation of HTIL.

Therefore, the entire valuation was based on HTIL's business. The deal also led to the change in ownership of HTIL. Therefore, the department decided to raise the capital gains tax in the transaction.

The I-T department flayed the claim that the decision to levy tax will affect the inflow of foreign fund. "Tax dispute with Vodafone will not impact foreign fund inflow," said S S N Moorthy, chairman of Central Board of Direct Taxes of the Mumbai region. In fact, since the department raised the demand, foreign fund inflow has gone up. In the current year so far, India received over $22 billion (Rs 1 lakh crore) foreign fund.