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Vodafone Warns India Tax Bill to Hit $5 Billion

James Lamont in New Delhi
Monday, 11 Jul 2011 | 8:00 PM ET

Vodafone, the UK-listed telecoms company, has warned it faces a doubling of the $2.5 billion tax bill it is contesting in the India Supreme Court in July.

An Indian man checks a new mobile phone at a shop in New Delhi on May 12, 2010.
Manan Vatsyayana | AFP | Getty Images
An Indian man checks a new mobile phone at a shop in New Delhi on May 12, 2010.

Andy Halford, Vodafone’s chief financial officer, said on Wednesday night that the Indian authorities had threatened to impose penalties for non-payment that could raise its outstanding tax liability to $5 billion.

The Indian authorities are pursuing Vodafone for tax that they maintain is due on its 2007 acquisition of Hutchison Essar, a fast growing Indian mobile operator, for $10.9 billion.

A controversy over untaxed capital flows out of India has gripped the Indian parliament in recent months as the country’s leaders battle a series of high-profile corruption scandals, including allegations of a $39 billion telecoms licensing scam.

“It’s put us in an invidious position,” said Mr Halford. “[The bill] is either $2.5 billion or it could be double that if we take extreme [scenarios]. We’ve done a lot of M&A and this has never happened. We are not making any moves until this is resolved.”

Vodafone has set aside $2.5 billion in an escrow account in the event that the Supreme Court rules against its case before the end of the year. But the UK company has made no special provision for the liability in the belief that it will win the case.

Mr Halford told the Financial Times that Vodafone had about £14 billion in cash after the sale of assets in China, Japan and Spain. It would return about half of this to shareholders, while keeping the remainder for the tax bill and upcoming spectrum sales around the world.

He said Vodafone would be able to absorb the cost as it was “a big company”. But he warned that the tax dispute had already “deflected from running the business” and risked slowing down future expansion after the telecoms multinational had made an overall $23 billion investment in India.

Vodafone’s case comes before the Supreme Court on 19 July and is expected to run for 12 weeks before a judgment. The company had earlier fought the case in the Mumbai High Court.

Vodafone argues that no tax is due on the transaction because it was conducted between two non-Indian companies in the Cayman Islands, a favoured low tax jurisdiction. It also claims that it is the first foreign company in 50 years to be singled out by the Indian authorities for a retrospective liability on an acquisition.

Should India’s tax authorities win the case, other international companies including AT&T, the US telecoms group; Sanofi-Aventis, the French pharmaceuticals company, and global engineering group General Electric may be liable for tax on mergers and acquisitions transactions concerning assets in India.

Previous deals may also come under the revenue service’s scanner.

Some analysts claim that this kind of unpredictability is responsible for a fall off in foreign direct investment to India compared with other big emerging markets like China, Brazil and Russia.

Mr Halford said that Vodafone was urgently seeking regulatory and fiscal clarity that it considers has been muddied by retrospective changes to licences and application of an unexpected tax liability.

“We need to get clarity on regulatory aspects that have been unclear for a while,” he appealed.

India has a highly competitive telecoms market, notorious for some of the cheapest mobile telephony in the world and, of late, suspected corruption over its mishandling of a 2G spectrum auction three years ago.

Vodafone still insists India is not hostile to foreign capital in spite of the regulatory difficulties it faces alongside other UK companies like resources groups Cairn Energy and Vedanta. Yet, its entry into the Indian market has been costly.

“Has it proved to be an expensive [acquisition]? Yes, it has,” said Mr Halford.

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