India Supreme Court begins hearing Vodafone tax case

India's Supreme Court Wednesday began hearing a dispute over local authorities' moves to tax and levy penalties on Vodafone Group PLC over the UK company's 2007 purchase of a majority stake in Indian mobile phone operator Hutchison Essar Ltd. The case is being eagerly watched globally with likely implications on foreign investments into India. The uncertainty created by the tax case is already viewed as one reason foreign direct investment has declined in India in the past year, as companies wait for clarity on the tax regime.
Vodafone has challenged a lower court order allowing local authorities to tax the company for its $11.2 billion purchase of a 67% stake in what is now Vodafone Essar, a joint venture with the Essar Group. It has also appealed against the tax body's move to seek a penalty in addition to the demand for about $2.5 billion in taxes and interest. The penalty, Vodafone has said, could be as high as 100% of the taxable amount.
The case--which was scheduled to start in the Supreme Court of India on July 19, but has been delayed due to a separate case overrunning--is expected to run for a few months as it is unclear how many days the court will sit, say experts. A counsel for Vodafone said a judgment is likely by December. Vodafone, the world's biggest mobile network operator by sales, is fighting tax authorities over its purchase of Hutchison Whampoa Ltd.'s stake in Vodafone Essar.
The deal involved the sale of a Cayman Islands company owned by Hutchison to a Vodafone holding company in the Netherlands, leading Vodafone to claim that no capital gains tax was due in India since neither company involved in the purchase was Indian. Vodafone also believes that even if tax were due in India, it is the seller, Hutchison, not the buyer that should pay.
Local tax authorities argue Vodafone should have withheld tax when it bought the stake. The telecom major has already paid to the Supreme Court a refundable deposit of INR25 billion ($564.7 million) and also provided a bank guarantee worth INR85 billion with a state-run bank under the apex court's directions.
Vodafone-the third largest mobile phone operator in India with a subscriber base of nearly 140 million--has had a tough time in the country since its entrance in 2007. The group booked a GBP2.3 billion impairment charge on its Indian operations in May 2010 due to stiff competition and a fierce price war.

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