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Business Standard

Vodafone tax demand may exceed Rs 20,000 cr

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After the enactment of retrospective amendments to the next month, the government may ask Vodafone to pay in excess of Rs 20,000 crore — more than two and half times the tax amount the telecom major was “advised to withhold” on its $11-billion deal with in 2007.

The retrospective amendments and a validation clause, legalising the tax demand despite the Supreme Court having quashed it, may empower the tax department to restore the earlier demand. The department has estimated Vodafone’s dues at Rs 20,300 crore, comprising tax of Rs 7,900 crore on the transaction, interest of about Rs 4,500 crore, and a penalty of Rs 7,900 crore for failure to deduct tax at source.

“There is no need to raise a fresh demand. We have not amended the law. The intent of the law has always been the same and we just clarified it... The earlier demand stays and they may be asked to pay interest and penalty on that,” said a finance ministry official, who did not wish to be identified.

An email query sent to Vodafone on the issue did not elicit a response.

The finance ministry may go ahead with the demand despite the apex court’s judgment going in Vodafone’s favour, as a validation clause proposed in the will make valid the demands raised under the Income Tax Act in certain deals. The clause will be effective irrespective of court judgments.

In an interview with Business Standard yesterday, Finance Secretary had said that in March 2007, when Vodafone remitted payment to Hutchison for buying its stake in Hutch Essar, the tax department had told the UK-based telecom operator that its transaction was liable to tax.

Terming his comments completely untrue, Vodafone said, “At no point before the transaction concluded and the payment was made did any entity of the Vodafone Group receive any communication at any of its business addresses from the Indian tax authorities requesting a payment of withholding tax.”

Vodafone said some letters were indeed sent to Hutchison but none of them indicated the tax authorities were reinterpreting 45 years of settled tax practice. “The Supreme Court expressly confirmed that Section 9 cannot, by a process of interpretation, be extended to cover indirect transfers of capital assets,” it said.

Ministry officials, however, said Vodafone was liable to withhold tax at 20 per cent of the capital gains, but it did not. Now interest is being calculated on Vodafone’s tax dues at a rate of one per cent per month. Besides, under Section 271C of the Income Tax Act, a person who fails to deduct tax as required under the law is liable to pay a penalty equal to the tax amount, they said.

The assessing officer has powers to waive off the interest and penalty on the outstanding dues of a taxpayer, which amount to Rs 12,400 crore in this case. The finance ministry, however, may not do so in Vodafone’s case as it does not want to be seen as giving “favourable” treatment.

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