In major setback to global businesses in India, the outgoing government has opted out of the conciliation process with Vodafone India involving $3.3billion or around Rs 20,500 crore relating to two tax disputes and penalties thereof.
Market players interpreted the move as one where government may well have washed its hands of the Vodafone tax disputes.
The Cabinet in June last year had approved the finance ministry's proposal to a conciliation process on certain tax claims.
The nod came in after UK-based parent Vodafone Group threatened international arbitration for violating a bilateral investment treaty that protects companies in a foreign land.
The Supreme Court, in its January 2012 judgment that favoured Vodafone, said the income tax department had "no jurisdiction" to levy tax on overseas transaction.
Vodafone entered India in 2007 through a Netherlands subsidiary that acquired Hutchison Telecommunication International's stake in Hutchison Essar.
This indirect entry led the government to believe that foreign companies were avoiding taxes payable and hence made a claim that was rejected by the Supreme Court in 2012. Not satisfied with the latter's judgment, the government changed tax laws retrospectively and held Vodafone liable for tax payment amounting to $3.3 billion.
Besides, the government subsequently had another claim on a transfer pricing of Rs 8,500 crore relating to Vodafone India.
Parent Vodafone Group urged the Indian government to club all the tax issues under the conciliation process, but the finance ministry refused to do so and only took on the capital gains tax issue of $3.3 billion.
One of the main reasons for this demand was to close all the disputes at one go instead of keeping them unresolved for another government to harass.
Observers say, with the general elections round the corner, the government does not want to risk being accused of favouring Vodafone.
Repeated attempts failed to elicit an explanation from Vodafone's headquarters in the UK.
The company has so far invested over Rs 1 lakh crore ($18.2 billion) in India, making it the biggest foreign investor in the telecom industry.
Given the kind of investments in India, Vodafone in all its prudence would bide time till the new government is formed, observers say. Vodafone has all along maintained it was in no way liable to pay tax in India.
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