"We (have) accepted the offer of Vodafone to enter into a non-binding conciliation. The outcome of the non-binding conciliation will be brought back to the Cabinet.
"If both sides (Vodafone and the government) agree on the outcome of the non-binding conciliation then the matter will be taken to Parliament by an amendment to the Income Tax Act," Finance Minister P Chidambaram told reporters after the meeting of the Cabinet.
The conciliation will be under the Indian arbitration law and not under the UNCITRAL as sought by Vodafone. The company did not offer any comment immediately.
Chidambaram, however, did not say if the tax demand will be stayed during the pendancy of conciliation.
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"The tax demand has already been made so whatever the status of tax demand today will continue ... Cabinet has approved that conciliator can be appointed. We will go with the names to Prime Minister", he said.
The Supreme Court last year had ruled in Vodafone's favour, saying the British company was not liable to pay any tax over its 2007 acquisition of mobile phone assets in India.
But the government later in the year changed the rules to enable it to make retroactive tax claims on already-concluded deals, drawing criticism from global business groups.