In a development that would effectively rule out the possibility of an amicable settlement of the tax dispute with Vodafone, the government is set to counter the company’s notice threatening international arbitration under an investment protection treaty. It is also readying a tax demand of nearly Rs 12,500 crore on the company after the Finance Bill’s passage in Parliament.
An appellate body will separately decide whether a penalty of Rs 7,900 crore, slapped on Vodafone last year for not withholding the tax while making payment to Hutchison, would be valid.
The inter-ministerial group looking into Vodafone’s notice over retrospective amendment of the Income Tax Act is likely to meet later this week to frame a reply. The group, headed by Finance Secretary R S Gujral, is expected to tell Vodafone that tax issues are not covered under the Bilateral Investment Promotion and Protection Agreement (BIPA) between the Netherlands and India and that the Indian Parliament’s supreme right to enact laws could not be questioned.
Instead of raising a fresh demand, the tax department may send a tax notice to Vodafone, saying the old demand, with an interest of about Rs 4,500 crore at the end of May 2012, had been validated by clause 113 of the Finance Act. The tax department is of the view the penalty notice of Rs 7,900 crore issued in March 2011 would remain valid, as the matter was pending before the Commission of Income Tax (Appeals).
The government is not willing to give any reprieve to the company on interest payment either. After the Supreme Court judgment quashed the tax department’s demand earlier this year, the government refunded along with interest the tax of Rs 2,500 crore Vodafone had deposited. While issuing the refund on March 18 (two days after the Budget was presented), the tax department had told Vodafone the demand might be revalidated after the passage of the Finance Bill, said a finance ministry official.
While the ministry is now confident about the tax validity of its tax demand, it appears to be on shaky ground as far as the penalty is concerned. Some officials are of the view that since retrospective amendments do not apply to penal provisions, the government would not be able to sustain the penalty demand, especially when the Supreme Court had ruled in the favour of the telecom company.
Even if the Commission of Income Tax (Appeals) rules in favour of the government, the company can challenge it in a higher court or tribunal.
A ministry official, however, said since the retrospective amendments were not substantive and only clarificatory in nature the penalty demand would be sustainable.
Vodafone can also seek a penalty waiver in the Income Tax Settlement Commission, provided it withdraws its petition before the Bombay High Court and agrees to be a representative assessee of Hutchison in India under Section 163 of the Act. The Supreme Court verdict was under Section 201, which deals with failure to deduct tax at source. In that respect, the assessment of Vodafone is yet to happen. The matter was likely to come up for the next hearing in the Bombay High Court in June, an official said. In about 90 per cent cases, the Settlement Commission waives off the penalty and even the interest in many cases. Thus, Vodafone’s net tax liability may come between Rs 7,900 crore (the tax demand) and Rs 12,400 crore. Even in other courts, past experience shows whenever there was a retrospective amendment, the penalty demand was quashed.
Meanwhile, the company said in a statement, “We are naturally disappointed that, despite very widespread concern in India and internationally, the government has not seen fit to propose amendments to address the uncertainty caused by retrospective tax legislation. We are studying the legislation as amended, and will take all possible steps to safeguard our shareholders’ interests.”