I-T pegs Vodafone's liability at Rs 12,000 cr

British telecom major Vodafone Plc today received a new showcause notice from the income tax (I-T) department, quantifying its liability at Rs 12,000 crore on its 2007 acquisition of a majority stake in Hutchison Essar. The company is expected to approach the High Court here over the next few days to challenge the notice.

The amount claimed is on account of Vodafone’s not deducting tax from the payment made to Hutchison for acquiring the latter’s stake in an Indian telecom venture. Vodafone had paid $11.2 billion to acquire Hutch’s 67 per cent stake in Hutchison Essar and the I-T department had demanded payment of capital gains tax.

The entity now called Vodafone Essar is the second largest telecommunications company in India, with over 100 million customers.

While Vodafone confirmed receipt of today’s notice, government officials said Rs 12,000 crore was not a “demand notice” but a “showcause notice”. This meant it had calculated the liability at Rs 12,000 crore but not demanded the payment immediately. The telecom company has time till June 14 to respond.

“We have received a letter from the tax authorities, granting us a date for a hearing to discuss the potential quantification of any tax on the Hutchison acquisition,” Vodafone said in a statement this evening.

Tax officials had earlier pegged Vodafone’s liability at $2 billion (Rs 9,000 crore, at an exchange rate of Rs 45 to a dollar). The amount mentioned in the showcause notice would include the interest and penalty. It is also the first time a specific amount has been formally communicated to Vodafone; earlier notices specified the department’s view on tax being liable and it having jurisdiction on the UK-headquartered company on this matter.

A few days earlier, the department had sent an order to the company, claiming legal jurisdiction on Vodafone and explaining why it should pay capital gains tax on the Hutch deal. The liability for payment of capital gains tax was on Hutch but on its part, Vodafone had to deduct tax (tax deducted at source in official parlance) before making the payment to the Hong Kong-based company, held the department.

Vodafone had been maintaining it was not liable to pay tax in India, as the deal was done abroad. However, Indian tax authorities deny this argument.

The matter had earlier gone to HC here and then the Supreme Court, after an I-T notice last October. Vodafone petitioned the HC and then the SC, challenging the tax department’s jurisdiction in the case. The SC had passed an order quashing that plea of Vodafone. and asked the Central Board of Direct Taxes to look into the issue. Today’s showcause notice is a sequel.