Vodafone gets a rejection from Supreme Court

In a blow to Vodafone, Supreme Court has refused to intervene in the tax case related to Hutchison/Essar stake case (Vodafone acquired 67% stake Hutchison Essar Ltd.)

Even if the company appeals against the tax demand with Commissioner Income Tax (Appeal) – the first appellate authority – Vodafone may have to pay half ($ 1 billion or Rs 4,900 crore) of the tax demand before the end of March. – source

The Contention

Vodafone acquired 67% stake in Hutchison Essar Ltd, India’s third largest mobile service provider, from Hong Kong-based Hutchison Telecommunications International (HTIL) in 2007.

  • Vodafone acquired a company registered in Cayman Islands, a known tax-haven, for $11.2 billion. It contended that the transaction involved two overseas entities so the company was not liable to pay tax in India.
  • As per tax department, the overseas transaction was related to assets acquired in India and hence, Vodafone should have deducted capital gains tax at source before paying HTIL.
  • As Long term capital gains tax is levied at the rate of 20 %, Vodafone will have to shell out $1.7 billion as tax liability, a penalty of an equal amount and a tax on both sums at 18% per annum. The total outgo for Vodafone could exceed $4 billion.

Vodafone, even if it appeals against the decision will have to pay 50% of the amount (i.e. $1Bn) by March, 2009.

Expect a cascading effect of this matter on 3G auction as well.

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