Vodafone tax dispute: Govt might waive interest & penalty

The government might take the middle path to resolve its long-pending tax dispute with Vodafone. According to tax officials and industry experts, waiving off interest by way of amending the law, while retaining the principal demand, looked the best possible solution in the given circumstances.

Business Standard spoke to some senior income-tax officials and tax experts to understand how the government could go about addressing the issue. The finance ministry has four options before it - amending the law to do away with retrospective taxation, fighting it out at an international tribunal, issuing a circular to clarify there would be no interest and penalty in cases of retrospective taxation, or seeking Parliament's approval for interest waiver. Most say the last option is more likely to be adopted.

While an amendment to the I-T Act is not necessarily required to waive interest, the government might choose to do so in this case, as the amount involved is huge.

"The Central Board of Direct Taxes (CBDT) can issue a circular to clarify there will be no interest and penalty. But it can be questioned by the Comptroller & Auditor General (CAG) for causing loss to the exchequer. So, it would be better to waive interest through an amendment to the law," said a senior official who did not wish to be named.

The principal tax demand raised by the income-tax authorities in the Vodafone case was Rs 7,900 crore. With interest, this amount doubled over the past seven years. Also, there is a penalty of at least 100 per cent of the principal amount.

"Technically, you don't have to amend the Act for an interest waiver. You can issue a general instruction under Section 119 reiterating the powers to the respective chief commissioners to waive off interest," said another official who has closely followed the case. He didn't wish to be named.

According to EY Partner Hitesh Sharma, there chief commissioners have certain powers that can be leveraged. But, typically, the finance ministry clarifies when there are wide ramifications and amounts are big. This one has ramifications as there are some similar cases that would also be affected.

"CBDT is empowered under the Act to bring out circulars to tone down its provisions. If it brings a circular for the benefit of a taxpayer, it won't be challenged. But if it wants to waive off interest, it should do so through the Act and not a circular," said PricewaterhouseCoopers Partner Rahul Mitra.

There is a consensus that a penalty can't be levied in this case, even if there is no circular or amendment. Penalties can be levied when there is a wilful default, besides other conditions. "Legally, there is no case for a penalty because Vodafone did the transaction under the belief it was not subject to withholding tax. So, when a notice for principal tax is sent, there is no need for a showcause notice for penalty to be issued. The matter ends there," said Khaitan & Co Partner Sanjay Sanghvi.

Tax officers, however, are of the view that the government might not take the risk of drawing the public wrath by completely dropping retrospective taxation. This was one reason why former finance minister P Chidambaram didn't do it despite the Parthasarathi Shome committee's recommendation that indirect transfers be taxed only prospectively.

"Politically, it doesn't make sense. If the amendment has Parliament's approval, CAG will not question it. But the government might face flak from the Opposition and common taxpayers for letting a multinational company get away without paying its dues," added the first official quoted earlier.

On the positive side, tax experts argue, if the government drops retrospective taxation, it will send a very positive signal to industry - that the government is for a stable and non-adversarial tax regime.

If none of these options is chosen, the government will have to proceed with arbitration under the United Nations Commission on International Trade Law. Both India and Vodafone have appointed their arbitrators. And, by August 17, they will decide on a third arbitrator who will be the chairman of the international tribunal. The flip side: If the verdict goes in Vodafone's favour, it would be an embarrassment for India, as the retrospective amendment was brought after overturning a Supreme Court ruling.

TO END A TAXING BATTLE
Options before the govt and their likely pros and cons

1 AMENDING LAW FOR INTEREST WAIVER

Pros: Govt gets Parliament approval; dispute can be amicably settled if Vodafone pays up principal amount
Cons: Vodafone and other firms in similar cases may argue they are not liable to pay even the principal

2 INTEREST, PENALTY WAIVER THROUGH A CIRCULAR

Pros: With a clarity on the issue, assessing officers won't ask for interest & penalty and amounts in disputes may be unlocked
Cons: Given the high amount involved, CAG might question the govt's revenue loss on account of the waiver

3 DROPPING RETRO TAX FROM THE ACT

Pros: Major boost to investor confidence; no more pleas in courts challenging constitutional validity of retro amendment
Cons: The common man's ire over loss to the exchequer, at a time when govt can't offer much tax relief

4 INTERNATIONAL ARBITRATION

Pros: Tax dept is confident the international tribunal won't decide on such tax disputes under the India-Netherlands Bippa
Cons: If ruling goes in Vodafone's favour, India's image as an aggressive tax administration might be further dented

THE STORY SO FAR

• May '07: Vodafone acquires Hutchison-Essar
• Oct '09: Revenue dept asks Vodafone why the deal is not taxable
• May '10: Dept claims jurisdiction to tax the deal
• Jun '10: Vodafone moves Bombay HC
• Sep '10: Bombay HC rules in favour of the revenue dept; Vodafone moves SC, which asks dept to quantify tax dues
• Oct '10: Revenue dept raises tax demand
• Apr '11: SC bars the dept from enforcing penalties till case is resolved
• Jan '12: SC rules in favour of Vodafone
• Mar '12: Retrospective changes to I-T Act announced
• Jun '13: Cabinet offers conciliation talks
• Feb '14: Note put up before Cabinet to withdraw conciliation; Cabinet asks finance ministry to hold it till tax tribunal decides on Vodafone's transfer-pricing case; Subsequently, I-T prepares another Cabinet note to withdraw conciliation, sensing tribunal is taking time to decide on the transfer-pricing case
• Apr '14: Vodafone insists on international arbitration; India withdraws conciliation offer
• June, 14: Finance Minister Arun Jaitley recuses himself from Vodafone case
• June, 14: Govt appoints former chief justice of India, R C Lohati, as arbitrator