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I-T dept plans to cash in on Vodas diverging statements
December, 19th 2007
The income tax department, which is in the middle of a legal showdown over the taxability of the recently-concluded $11-billion Vodafone-Hutchison Telecom International (HTIL) deal, is gearing up to use Vodafones statements to support the departments claim for a $2-billion capital gains tax.

The I-T department hopes this will turn the tables in its favour. Vodafone had stated in its agreement with the Essar group as well as with other entities involved in the deal, and in several deal-related announcements, that it was taking over the 67% stake in the telecom business of Indian telecom major Hutch-Essar, now renamed Vodafone-Essar.

This piece of information runs against the tenor of argument of Vodafone. Vodafone had argued that it only bought over the shares held by CGP Investments, a company based in Cayman Islands. CGP, which held 67% stake in Hutch-Essar, was a 100% subsidiary of the Hong Kong-based Hutchison International.

The deal has taken place outside India, between the two companies that were registered outside the country. Hence, it is not libale to pay tax in India. Moreover, Vodafone had said that tax should be paid by the seller of shares, not the buyer. This was the sum and substance of Vodafones argument.

However, the I-T department thinks that Vodafones earlier statement that it is taking over 67% stake in Hutch-Essar would support its claim for capital gains tax. This statement, according to the department, suggests that Vodafone knew it was taking over an Indian company, therefore it should have complied with the tax laws of the land.

The department believes this can counter Vodafones main argument for refusing to pay capital gains tax in India. Though the company which was holding the shares was located outside India and is beyond the jurisdiction of local tax authorities, the IT department went ahead with the claim that the shares of Indian company changed hands.

Clearly, the department is in no position to make the claim on the Hong Kong-based Hutch. As a result, it feels that the onus of tax payment lies with Vodafone, the new buyer. The I-T department believes that Vodafone should have deducted from the amount it paid to HTIL for paying the capital gains tax on the deal.

This was the basis on which it sent the notice to Vodafone-Essar asking it to explain why it should not be considered the British telecom giant Vodafones agent in India.
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