* Vodafone wanted to add separate tax dispute - govt note
* Finance ministry to seek cabinet OK to scrap talks
* Vodafone may seek international arbitration
By Devidutta Tripathy and Rajesh Kumar Singh
NEW DELHI, Feb 12 India plans to pull out of
talks with Britain's Vodafone Group Plc over a $2
billion tax dispute, in a move that will prolong a more than
six-year old row and increase uncertainty among investors in
Asia's third-largest economy.
India's finance ministry is preparing to seek the federal
cabinet's approval to withdraw conciliation proceedings after
Vodafone wanted a separate tax dispute to be made part of them,
according to an internal government note seen by Reuters.
Policy uncertainties in India have unsettled investors,
with tax claims on foreign companies being one of the major
concerns. IBM, Royal Dutch Shell Plc and Nokia
are among foreign firms contesting local tax claims.
Vodafone, the world's second-largest mobile operator by
subscribers, entered India in 2007 by acquiring Hutchison
Whampoa's mobile phone assets. It is contesting a tax
bill of about 112 billion rupees ($1.8 billion) relating to the
The Indian Supreme Court ruled in 2012 that Vodafone was not
liable to pay any tax over the transaction. But the government
changed the rules, allowing it to make retroactive tax claims on
completed deals and drawing criticism from business groups.
The Indian cabinet gave the go-ahead for conciliation talks
with Vodafone last June. While formal talks are yet to begin,
Vodafone and Indian government representatives had a series of
meetings last year.
Vodafone had insisted that the conciliation talks included a
transfer pricing dispute involving a unit offering call-centre
services to group companies.
The government disagreed leading to its move to scrap the
talks, according to the note.
"The matter related to Vodafone will be taken to the
cabinet, and the cabinet will take a final decision," D.S.
Malik, a finance ministry spokesman, told Reuters on Tuesday,
declining to comment on the specifics of the ministry's plan.
Vodafone has not been informed as the plan has yet to
receive cabinet approval, sources with knowledge of the
development said. Vodafone declined to comment.
No date has been set for the cabinet discussion, a
government official said on Wednesday.
The formal scrapping of talks would allow the Indian tax
office to renew its demand on Vodafone, first made in 2007 and
quantified three years later. The demand in 2010 totalled about
112 billion rupees, including interest until then, and could
Discussions in the conciliation plan approved by the Indian
cabinet last year were to include the tax amount, the interest
to be charged, and if there should be any penalty levied.
NOT LIABLE TO PAY TAX
Vodafone, whose Indian mobile services business is the
country's second-biggest by users and revenue, has repeatedly
said that it was not liable to pay any tax over the Hutchison
In 2012, Vodafone threatened India with international
arbitration proceedings under a bilateral investment agreement
after the government changed rules to retrospectively tax deals.
Vodafone will likely appeal to an Indian court and may
reopen the international arbitration option if the conciliation
talks are scrapped, experts said.
"If there is a notice on (tax) demand, I think they will
challenge the amendment in the court as unconstitutional," said
Ajay Vohra, managing partner at New Delhi-based Vaish Associates
"It will drag on," Vohra said.