Cabinet clears conciliation to resolve Vodafone tax issue

Vodafone has been involved in a Rs 11,200 crore tax dispute for the purchase of Hutchison's stake in Hutchison Essar in 2007.

New Delhi: Seeking to resolve the long- standing tax dispute with Vodafone, the Cabinet Tuesday approved a proposal for non-binding conciliation with the British telecom major, the outcome of which will ultimately be vetted by Parliament.

"We (have) accepted the offer of Vodafone to enter into a non-binding conciliation. The outcome of the non-binding conciliation will be brought back to the Cabinet.

"If both sides (Vodafone and the government) agree on the outcome of the non-binding conciliation then the matter will be taken to Parliament by an amendment to the Income Tax Act," Finance Minister P Chidambaram told reporters after the meeting of the Cabinet.

Vodafone had been asked to pay Rs 11,200 crore tax on its 2007 acquisition of Hutchison Whampoa’s stake in Hutchison Essar. The demand included Rs 3,300 crore of interest over delayed payment.
The conciliation will be under the Indian arbitration law and not under the UNCITRAL as sought by Vodafone. The company did not offer any comment immediately.

Chidambaram, however, did not say if the tax demand will be stayed during the pendancy of conciliation.

"The tax demand has already been made so whatever the status of tax demand today will continue ... Cabinet has approved that conciliator can be appointed. We will go with the names to Prime Minister", he said.

The Minister said that no timeframe has been set for conclusion of the conciliation proceeding, but added that government would communicate today's cabinet decision to Vodafone in a day or two.

The Supreme Court last year had ruled in Vodafone's favour, saying the British company was not liable to pay any tax over its 2007 acquisition of mobile phone assets in India.

But the government later in the year changed the rules to enable it to make retroactive tax claims on already-concluded deals, drawing criticism from global business groups.

Chidambaram said it is in India's interest to resolve the case through the process of conciliation.

"Two conciliators will sit together and they would come out with an outcome. It is not an arbitration. They will suggest an outcome, a modified outcome and it is a step by step approach. Everything is in public domain.

"They will have to give an outcome which is non-binding on both sides and then Vodafone will take it to its Board, I suppose. And Ministry of Finance will take it to Cabinet. ... Ultimately, the final word will be that of Parliament. It is a non-binding conciliation," he said.

On what would happen if one of the sides does not agree to the outcome, Chidambaram said, "let's see what the outcome is."

The Minister said what the Cabinet has done today was strictly in accordance with the Parthasarathi Shome committee's recommendations which had suggested that past disputes should be resolved through conciliation and not through retrospective amendments to tax laws.

When a questioner suggested that the government's decision today was not in conformity with Committee's recommendations, he said probably the reporter had not read the relevant paragraph properly.

"The committee has said that there should be no retrospective legislation in tax matters," Chidambaram said.

Although the British telecom firm had won a tax case in the Supreme Court (January 2012), the government had amended the Income-tax Act, 1961 with retrospective effect to undo the ruling.

Following that, the Income Tax Department issued a letter in January to Vodafone International Holdings BV stating that the company is required to pay tax demand along with interest.