Vodafone might avoid paying a $2.2 billion (£1.37 billion) tax demand after the Indian government registered its opposition to retrospective levies.
A government review panel within the Indian finance ministry says that retrospective tax demands should only be made in the "rarest of rare cases," according to Bloomberg, and that changes made to the way capital gains on cross-border deals are taxed should only apply to future transactions.
Should the Indian government accept the panel's guidance, Vodafone will not be liable for its 2007 purchase of Hutchison Whampoa Indian assets, Ernst & Young and KPMG said.
"If the report is fully implemented, then Vodafone will be exonerated entirely," Mumbai-based Dinesh Kanabar, chairman of taxes at KPMG's local unit, told Bloomberg. "The retrospective amendment, if deemed to be a valid law, would allow the government to proceed against Hutchison, not Vodafone. Whether they want to do that is a separate issue."
This move comes after Vodafone indicated last month that it might be willing to settle the case by paying the original tax claim and not the interest or any penalty.
The panel's recommendation not to impose retrospective tax is part of a wider review of Indian tax regulations that were increasingly seen as hindering foreign investment. The revision to retrospective taxation also coincided with a two-day visit to India by US treasury secretary Timothy Geithner where he praised wider policy changes announced last month by Indian PM Manmohan Singh to attract investment from overseas firms.
Separately, Vodafone is reported to be preparing a bid in the $7 billion spectrum auction that is scheduled to take place in India this November.
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