Conciliation with Vodafone may need changes in two laws

Amendment to the I-T Act would be needed to have a uniform law for all companies as the government fears conciliation with Vodafone might open a Pandora's Box

The government might consider amendments to the Income Tax Act, 1961, as well as the Arbitration and Conciliation Act, 1996, to resolve its Rs 14,000-crore tax dispute with Vodafone. This is because the current law does not provide for conciliation between a firm and the sovereign state. A decision on this would be taken after the Cabinet approves Vodafone’s offer for conciliation.

India’s existing framework, based on the UN Commission on International Trade Law, needed to be amended to enable conciliation, as “there is no provision for settlement of a dispute between the sovereign and a company, as they are not contractual parties,” said an official privy to the development, asking not to be named.

At present, though settlement of tax issues is covered under an Arbitration and Conciliation Act in some countries, India does not specifically provide for it and, hence, a clarification is required.

Amendment to the I-T Act would be needed for a uniform law for all firms, as the government fears the Vodafone settlement might open a Pandora’s Box, with other firms caught in similar cases also approaching the government.

In January 2012, Vodafone had won a legal battle against the government when the Supreme Court ruled it did not need to pay taxes on its acquisition of Hutchison Whampoa’s India assets, as the transaction had been between two foreign firms and there was no provision to tax such deals.

The government then brought retrospective amendments in the I-T Act to tackle Vodafone-like cases. And, the I-T department sent a notice to Vodafone to pay Rs 14,000 crore, including Rs 6,000-crore interest. There also is a provision to impose a penalty of 100 per cent of the demand, which will be Rs 7,900 here.

Some finance ministry officials agree interest and penalty should not be levied if there is a retrospective amendment. So, if the government is to go for conciliation, it might look to provide clarification in the Act, or through a circular that penalty and interest would not apply in such cases. Without waiver on the penalty and interest, the company would have to pay about Rs 22,000 crore.

“On one hand you have an SC decision in Vodafone’s favour. On the other, you have amendment to the I-T Act, which requires the firm to pay the tax. So, through conciliation, they are trying to reach an out-of-court settlement,” said Pranay Bhatia, partner, Economic Laws Practice.