February 12, 2014 2:39 am

India poised to scrap talks on $2.6bn Vodafone tax dispute

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Indian workers put up the signboard of telecom firm "Vodafone"©Getty

India’s government is poised to scrap talks aimed at resolving a $2.6bn tax dispute with UK mobile operator Vodafone, in a move likely to raise fresh concerns about the nation’s investment climate.

Palaniappan Chidambaram, India’s finance minister, said last January that he expected a speedy negotiated solution to the long-running dispute, but talks with the company have since stalled, according to people familiar with the situation.

Indian media reported on Tuesday that the finance ministry had circulated a memorandum arguing that the year-long negotiations should now be scrapped.

The document implies that Vodafone is at fault for the collapse of the talks, given its demands that other unrelated tax disputes be included in any settlement, according to Reuters.

D S Malik, a spokesman for the finance minister, told the Financial Times that a final decision on the talks would now be referred to India’s cabinet, but declined to comment on the process itself.

Vodafone also declined to comment, although people familiar with the process said the talks had failed to achieve anything close to a breakthrough.

A definitive move to scrap the reconciliation discussions would mark a further twist in what has become India’s most celebrated and closely watched foreign business dispute, raising accusations of changeable regulation and capricious treatment by policy makers.

The development also comes at a delicate time for India’s economy as many global businesses await the outcome of national elections in May, in the hope that a change of government could improve India’s dented position as a friendly investment destination.

An end to the present process would leave Vodafone in limbo until after the elections, and raise the risk that India’s tax department would begin proceedings anew to recover tax that it believes to be due in the case.

Vodafone’s dispute relates to capital gains tax allegedly due on the company’s purchase of Hutchison Essar for $10.9bn in 2007, a claim the British group disputes, and upon which it is supported by most independent tax experts.

The reconciliation process has been led by the chairman of Vodafone’s Indian division, Analjit Singh, alongside visiting executives from the UK, including chief executive Vittorio Colao.

The process foundered early, however, partly because a binding settlement required politically controversial legislative changes – in effect to stop any future government from reopening the case.

The case has been especially controversial because of legal changes allowing India’s tax department to reopen tax cases retrospectively even if the company involved had won a victory in front of India’s Supreme Court, as Vodafone did in 2012.

Melissa Frakman, director of financial policy at the US-India Business Council, a trade group, said the development was likely to be greeting with apprehension by international companies.

“Tax uncertainty remains a fundamental concern for global companies invested in India,” she said. “The implications of this case are far-reaching and as foreign investors are watching closely for any signals of a policy turnround away from the retrospective tax concerns that arose partly from Vodafone’s case.”

The retrospective ruling has been attacked by foreign companies and Indian business figures alike, including Raghuram Rajan, head of the Reserve Bank of India, who condemned the ruling before taking over at the central bank in September.

“A government that changes the law retrospectively at will to fit its interpretation introduces tremendous uncertainty into business decisions,” he said in 2012.

“India has missed a golden opportunity to show its respect for the rule of law . . . That is far more damaging than any tax revenues it could obtain by being capricious.”

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