India seeks to scrap $2 bln tax dispute talks with Vodafone

By Devidutta Tripathy and Rajesh Kumar Singh

NEW DELHI (Reuters) - India plans to pull out of talks with Britain's Vodafone Group Plc over a $2 billion tax dispute, in a move that will prolong a more than six-year old row and increase uncertainty among investors in Asia's third-largest economy.

The finance ministry is preparing to seek the federal cabinet's approval to withdraw conciliation proceedings after Vodafone wanted a separate tax dispute to be made part of them, according to an internal government note seen by Reuters.

Policy uncertainties in India have unsettled investors, with tax claims on foreign companies being one of the major concerns. IBM , Royal Dutch Shell Plc and Nokia are among foreign firms contesting local tax claims.

Vodafone, the world's second-largest mobile operator by subscribers, entered India in 2007 by acquiring Hutchison Whampoa's mobile phone assets. It is contesting a tax bill of about 112 billion rupees relating to the acquisition.

The Supreme Court ruled in 2012 that Vodafone was not liable to pay any tax over the transaction. But the government changed the rules, allowing it to make retroactive tax claims on completed deals and drawing criticism from business groups.

The cabinet gave the go-ahead for conciliation talks with Vodafone last June. While formal talks are yet to begin, Vodafone and government representatives had a series of meetings last year.

Vodafone had insisted that the conciliation talks included a transfer pricing dispute involving a unit offering call-centre services to group companies.

The government disagreed leading to its move to scrap the talks, according to the note.

"The matter related to Vodafone will be taken to the cabinet, and the cabinet will take a final decision," D.S. Malik, a finance ministry spokesman, told Reuters on Tuesday, declining to comment on the specifics of the ministry's plan.

Vodafone has not been informed as the plan has yet to receive cabinet approval, sources with knowledge of the development said. Vodafone declined to comment.

No date has been set for the cabinet discussion, a government official said on Wednesday.

The formal scrapping of talks would allow the tax office to renew its demand on Vodafone, first made in 2007 and quantified three years later. The demand in 2010 totalled about 112 billion rupees, including interest until then, and could increase further.

Discussions in the conciliation plan approved by the Indian cabinet last year were to include the tax amount, the interest to be charged, and if there should be any penalty levied.

NOT LIABLE TO PAY TAX

Vodafone, whose Indian mobile services business is the country's second-biggest by users and revenue, has repeatedly said that it was not liable to pay any tax over the Hutchison acquisition.

In 2012, Vodafone threatened India with international arbitration proceedings under a bilateral investment agreement after the government changed rules to retrospectively tax deals.

Vodafone will likely appeal to an Indian court and may reopen the international arbitration option if the conciliation talks are scrapped, experts said.

"If there is a notice on (tax) demand, I think they will challenge the amendment in the court as unconstitutional," said Ajay Vohra, managing partner at New Delhi-based Vaish Associates Advocates.

"It will drag on," Vohra said.

(Additional reporting by Kate Holton in London; Editing by Erica Billingham)