Newly-appointed Law Minister Kapil Sibal has overturned his predecessor’s decision on the Vodafone tax liability issue and has given a go-ahead for the matter to be resolved through conciliation. British telecom major Vodafone faces a Rs. 11,200-crore tax liability in India. Earlier this year, the Law Ministry, under Ashwani Kumar, had rejected the Finance Ministry's proposal for conciliation with Vodafone, saying it was illegal. Attorney General GE Vahanvati too had advised against a compromise and had said Vodafone must pay its dues.
But after Mr. Sibal took charge of the ministry from Mr. Kumar, who resigned last week, the Attorney General (AG) has given a fresh opinion, saying Vodafone's conciliation offer is legally tenable.
Mr. Vahanvati explained, on Monday, that his new position was based on Finance Minister P Chidambaram's clarification at meeting with the Revenue Secretary and the Chairperson of the Central Board of Direct Taxes (CBDT) that the conciliation proposal would not bypass or alter the tax liability under the Income Tax Act. Mr. Chidambaram has further clarified, Mr. Vahanvati said, that the permission of the Cabinet was being sought for a non-binding conciliation only to discuss issues with Vodafone and has assured that no contract would be signed outside the provisions of the law.
The AG also emphasised that nothing would be done without Parliament's approval. With the Law Ministry's nod, the Cabinet will now take up Vodafone's conciliation offer. Mr. Sibal had said on Monday that he would work to ensure that “legal processes and procedures should not be an impediment to economic growth, but must fuel it.”
Vodafone is facing the tax liability for the purchase of Hong Kong-based Hutchison Whampoa's telecom business which involved stake in its Indian venture, Hutchison Essar, in 2007. After Vodafone won a tax case in the Supreme Court of India, the government amended the Income-tax Act with retrospective effect to undo the ruling. This happened while Pranab Mukherjee was the Finance Minister. Following that, the Income Tax Department issued a letter in January to Vodafone International Holdings BV stating that the company is required to pay tax demand of about Rs. 11,217 crore along with interest.
However, Vodafone replied back saying that they do not owe anything to the Indian government. Vodafone earlier wanted to take India to international arbitration but later offered conciliation on the issue. The legal battle was seen by some as having a discouraging impact on foreign investors' sentiments.