Telecom major Vodafone’s tax woes are set to increase immensely after Diwali by when the income tax department is planning to send it a showcause notice on its $11.2-billion acquisition of Hutchison’s 52% stake in Hutch-Essar in 2007. The notice, expected to be under Section 163 of the Income Tax Act, would merely establish the Indian tax authorities’ jurisdiction over the transaction.
“It’s not an upfront demand for tax under Section 201. The showcause notice (SCN) will simply ask Vodafone why it should not be taxed for capital gains in India under Section 163 of the IT Act,” a source close to the development said. Section 163 of the Act defines who all may be considered as agents of non-residents for the purpose of tax in India. Contending that the erstwhile Hutchison-Essar was an “agent” of non-resident Hutchison Inter-national; the income tax department has claimed that the Vodafone-Essar deal involved Indian operations and so is liable to be taxed in the country. The SCN will then pave way for the department to send a formal demand notice of nearly $2 billion to the telecom giant. While the capital gains tax liability is estimated at $1.7 billion, if the department finds Vodafone in default of tax payments, it would also be liable to pay a penalty and an 18% annual interest. While tax authorities have been pursuing the deal since 2007, it was only in January this year that the Supreme Court dismissed Vodafone’s special leave petition challenging a showcause notice issued by the income-tax department. This, in effect, allowed the tax department to go through the transaction details of the acquisition, something that Vodafone had steadfastly refused to do till then. The department had initially sent notices under Section 163 and 201 of the IT Act to the company. But Vodafone questioned the income-tax department’s jurisdiction over the deal on the grounds that it was carried out between two overseas companies. The stake was transferred directly from Hutchison International and routed through CGP Investment (Holdings), which is incorporated in the Cayman Islands, to Vodafone. Tax experts say 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.
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