NEW DELHI: Vodafone has rejected as "completely incorrect" the government's assertion that deals such as the UK mobile operator's 2007 purchase ofHutchison Essar would have been subjected to taxes had it taken place in developed countries, in a sharp escalation of the ongoing war of words between the two sides.
Finance Secretary RS Gujral had told ET in an interview that M&A deals involving domestic assets but executed overseas would have been taxed in the US, UK, other OECD countries and even China, as he accused Vodafone of treating India like a Banana Republic to avoid paying taxes.
But the world's biggest mobile operator said it "is completely incorrect to suggest these transactions are taxable in the US, UK or any other OECD member state".
"They would not seek to tax the indirect transfer of shares as proposed by India. In fact, the proposal to tax indirect transfers of Indian companies is without regard to international tax norms and is not in line with the OECD or UN model double-taxation treaty," Vodafone said in a statement to ET.
The company said although China had been imposing taxes on such transactions from 2008 onwards, it did so only when the deal structure lacked any commercial or business purpose.
On Friday, the US government too waded into the dispute, with Treasury Secretary Timothy Geithner raising the issue in his interaction with Finance Minister Pranab Mukherjee in Washington.
A statement issued by the US Treasury said Geithner noted that "certain tax provisions in ... (Budget 2012) have raised significant concern among US industry and dampened enthusiasm about India's investment climate".
Relations between Vodafone and the government have progressively soured as the Centre, despite losing its case in the Supreme Court, has moved to recover at least 11,000 crore in taxes that it claims from the UK telecom major on its $11.2-billion purchase of Hutchison Essar.
Although the deal, executed between subsidiaries of Vodafone and Hong Kong-based Hutchison, was sealed overseas, Indian tax authorities argue that the underlying asset was based in India and Vodafone should have deducted capital gains.
In January this year, Vodafone won a four-year legal battle against the government after the Supreme Court said it did not need to pay the tax because the transaction took place between two overseas companies and there was no provision in Indian law to tax such deals.
But the government has since moved to amend its tax rules in a manner that allows it to retrospectively (from April 1, 1962) tax cross-border share sales where the underlying asset is located in India.
The legislation, once passed by Parliament, could overturn the Supreme Court ruling, and has evoked protests from overseas governments, companies and international business lobbies.
But despite all the criticism, pressure and entreaties, the government has shown no signs of relenting and appears determined to recover taxes from the UK telecom company.
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