Vodafone ordered to pay tax on Indian deal

Indian tax authorities have ordered Vodafone to pay Rs112.18bn ($2.53bn) in back taxes for its $11bn acquisition of Hutchison Whampoa’s stake in a domestic mobile operator that it completed three years ago.

It is the latest blow for the British telecommunications group in its battle with the Indian tax department.

The payment, requested within 30 days, was at the top end of the range of analysts’ estimates.

Vodafone rejected the tax authorities’ demand and said it would take all the necessary actions to defend itself in a case closely watched by foreign investors.

Lawyers warned that the case could have serious implications for the future of cross-border deals in India.

“Vodafone strongly disagrees with the tax calculation released by the Indian Tax Office,” the group said.

“In this ‘test case,’ the tax authority is attempting to interpret Indian law as it has never been interpreted for the past 50 years and this also goes against internationally recognised tax norms.”

Vittorio Colao, global chief executive of Vodafone, told India’s Economic Times newspaper this week that future investments in India would hinge on a positive outcome of the legal battle.

“I have invested more in India because I do believe in the country, but of course now I also need a positive outcome from the tax case and stable regulatory environment to continue,” Mr Colao said.

“We need to get more certainty that regulation will not come back and bite us in order to confirm our investment.”

Vodafone bought a 67 per cent stake in Hutchison Essar, now known as Vodafone Essar, from Hutchison of Hong Kong in 2007.

The transaction was made via a Dutch company controlled by Vodafone that paid $11bn to a Cayman Islands entity run by Hutchison Whampoa, the seller, for another Cayman Islands group that indirectly held a controlling stake in the India-based mobile operator.

Last month the Mumbai High Court ruled that the deal should have been subject to Indian capital gains tax because the operating assets of Hutchison Essar were in India.

Vodafone appealed against the High Court’s decision, and argued that it was not liable for any tax on a transaction that occurred outside of India.

The $2.5bn tax claim will be reviewed on October 25 when the case will be brought before the Supreme Court in New Delhi.