The finance ministry is exploring the option of entering into a dialogue with Hutchison on the issue of payment of capital gains tax on its deal with Vodafone in 2007. The latest move has been prompted by growing doubts over raising a tax demand on Vodafone, despite the retrospective amendments in the tax law proposed in the Budget.
A senior income tax department official in the know of the discussions to have taken place in the finance ministry said the ministry was looking into the issue as a possible option.
Another official said though Hutchison did not have a representative office in India, the department had identified some people who were coming on behalf of the Hong Kong-based telecom company to keep a watch over the proceedings in the Supreme Court.
“Vodafone should have deducted and paid the tax. We also realise the ultimate liability is of Hutchison as capital gains accrued to them. However, the problem is Hutch is not an Indian tax resident. The department has identified representatives of Hutch and channels of discussions have been opened,” a person close to the development said on condition of anonymity.
Some tax experts and lawyers, directly or indirectly linked with the case, confirmed representatives of Hutchison from Hong Kong and London made visits to India just to keep a track of the court proceedings and also to cooperate with Vodafone in the matter.
The case pertains to Vodafone’s $11.5-billion purchase of 67 per cent stake in Hutchison India in February 2007. The income tax department lost the long battle against Vodafone in the Supreme Court in January this year and the government has subsequently proposed retrospective changes in the Income Tax Act to reverse the setback. “Discussions have happened in the finance ministry on looking at the possibility of identifying Hutch representatives in India for raising a tax demand on capital gains made through the deal,” said the official.
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Though a group has been set up by the finance ministry to suggest how the international transactions associated with Indian assets should be tackled after retrospective amendments, there is a view that sustaining the tax demand against Vodafone would be difficult.
In that case, the identified representatives of Hutch in India could be made liable to pay capital gains tax, indicated the official. That would also be possible only after amendments.
Earlier in 2008, a tax notice was sent to Essar, too, but the tax department did not pursue it at that time and focused on the Vodafone case, said a tax expert. According to one I-T department official, the option of the department contacting the Indian entity or businessman having stake in Hutch earlier cannot be ruled out completely at this juncture.
R S Gujral, who is finance as well as revenue secretary, when contacted, said he was not aware of the development. Some other officials, dealing with the case, however, refused to confirm or deny it.
The tax department has tried to put in place several layers of retrospective changes in provisions, including a validation clause for superseding even court judgments, in the Budget this year. The department’s endeavour now is to find a way to keep the tax recovery possibility alive in the case associated with the Vodafone-Hutch deal.