Vodafone's Indian tax bill could rise to €2.4bn

Vodafone could be forced to pay more than €2.4 billion (US$4 billion) if it loses its court case relating to tax claims by the Indian government over its Hutchison Essar acquisition, a Total Telecom report said.

The Total Telecom report quoted the Financial Times saying that 'the UK mobile phone group could face a penalty of 100% of the tax owed plus 12% interest a year if it loses the case.'

India is trying to levy €1.24 billion (US$2 billion) of capital gains tax on Vodafone's 2007 $11 billion acquisition of Hutchison Essar, despite Vodafone being the buyer and not the seller of the asset, on the grounds it should have withheld the tax on behalf of the government.

Vodafone argues that the transaction is not taxable because the deal itself took place overseas.

The acquisition of Essar saw a Dutch company controlled by Vodafone pay a Cayman Island-registered company controlled by Hutchison Whampoa €7 billion (US$11 billion) to buy another Cayman Island entity that indirectly held a controlling stake in the Indian operator.

However, India's government contends that since Essar's operating assets were based in India, the deal is subject to capital gains tax.

The development relates to a retrospective amendment to the country's tax law, which states that an entity that did not withhold tax when it should have done is classified as in default.

This means that if Vodafone loses its case, the government can then award a penalty which would bring the final sum payable by the operator to over €2.4 billion (US$4 billion).

According to the Financial Times, Vodafone opposes the amendment on the grounds that India's constitution forbids imposing such penalties retrospectively.

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