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Tax department go slow on Rs 13,000 crore Vodafone notice
June, 09th 2012

After a rush to retrospectively amend the I-T Act, tax authorities are going slow on raising a fresh demand on Vodafone as the government weighs the possible implications on the arbitration proceedings demanded by the British telecom giant.

"We are moving cautiously," confirmed a senior government source adding that the consensus is to avoid a precipitate measure until a comprehensive assessment of the fallout of the arbitration.

Although a section within the government is against the tax demand that has worried investors, the finance ministry has defended the Rs 13,000-crore tab. The go-slow is significant because of the estimate in many quarters that finance minister Pranab Mukherjee may soon be headed for the Rashtrapati Bhavan. The estimate is that a possible change in the finance ministry may ease pressure on the retrospective taxation issue.

Vodafone, which acquired Hutchison Whampoa's 67% stake in Indian telecom venture, faces the prospect of having to cough up capital gains tax on the acquisition. The tax department argues that Vodafone should have deducted tax before paying the amount to the Hong Kong-based company. Having failed to do so, it is now liable for the recovery of tax.

The two companies have, however, taken the view that no liability arose from the transaction and the Supreme Court too agreed with the contention that the deal was outside the jurisdiction of Indian tax authorities. The court quashed the tax demand on Vodafone.

Finance ministry Pranab Mukherjee, however, introduced a "clarificatory amendment" in the Finance Bill, arguing that the move was part of the fight against black money. The retrospective amendment, dating back to 1962, has enabled the tax department to raise a fresh demand on Vodafone, which will be followed by a notice to Hutch something the government is yet to act on.

Vodafone reacted by using the India-Netherlands bilateral investment agreement to serve a notice on the government threatening to initiate arbitration if the law was changed.

An inter-ministerial panel is of the view that the notice does not hold much ground, but the government has held back its punches on an issue that has become the benchmark of India's potential as an investment destination.

Sources said the government does not want the Vodafone tax issue to bounce back into the spotlight at a time when it is trying to show signals of taking steps to regain investor confidence. Mukherjee himself has tried to dispel the perception that the Vodafone precedent would apply to several similar deals.

In any case, realizing Rs 13,000 crore from Vodafone is not going to happen anytime soon. The government expects Vodafone to raise a fresh challenge in court as soon as the notice is served.

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