Vodafone may face $3 billion outgo in tax dispute

Vodafone could face a potential $3 billion plus outgo if the company loses the ongoing tax dispute in India. Tax experts, who spoke to maintain that if the company loses the $1.7-billion IT claim, it might have to shell out more on two counts--"compulsory interest'' as well as a penalty if the revenue department decides to levy one.

Agreed income-tax department counsel Beni Chatterjee: "With penalty and interest, the amount could substantially rise.'' An expert in international taxation, who did not wish to be named said: "The government could well impose a penalty which would more than double the amount being disputed. Contingent liability would amount to around $2.5 billion with interest, if the matter is cleared by June 2009.''

Experts alluded to three factors that could raise the initial claim--capital gains, if the department initiates penalty proceedings and "compulsory'' interest. Vodafone, which is challenging a $1.7-billion tax notice over its acquisition of Hutchison Whampoa, which led to its acquisition of Hutchison Essar in India, said earlier that a share purchase deal between two foreign companies was not taxable in India.

T P Ostwal, from taxation firm T P Ostwal and Associates, said: "The tax liability being in the range of $1.7 billion, the tax recovery could not be more than $2.1 billion. However, since the Indian law suggests maximum potential penalty of up to 300%, the figure could soar. In smaller cases, it could be levied, but I think the revenue officers will not levy beyond 100%. And that is only if Vodafone shows that there was no malafide intention to subvert tax.'' said Ostwal. He added that: "If it turns out to be a simple legal dispute, then penalty can't be enforced. If the company shows reasonable cause which can be established, no penalty can be imposed. To my mind, this is a bad case for levying penalty.''

Added another tax expert: "Penalty can only be levied if there is a wilful default. Vodafone can always ask for condonation of penalty, and show there was no intention to evade taxes. Interest, though, is mandatory.'' Though Vodafone has not yet indicated when it is filing an appeal, experts say it is bound to file it latest by December 31, 2008. The reason: the company is consolidating its accounts and this cost has to reflect in the same year.

Incidentally, a similar case is being heard at the Delhi high court involving General Electric. The `Genpac' case is also being watched closely.