Global Tax Alert | 5 June 2013

India approves initiation of non-binding conciliation process with Vodafone

  • Share

Executive summary

It has recently been reported in the media that the Government of India (GOI) has approved a proposal put forward by the Ministry of Finance to initiate a non-binding conciliation process to resolve its USD2b tax dispute with Vodafone International Holdings B.V. (Vodafone NL). Specific details relating to the proposal, as well as the legal mechanism for implementing the proposal, remain to be announced. If the proposal is implemented, it would be the first such process in India for resolving a tax dispute between a taxpayer and the GOI.

Background

In January 2012, in a landmark judgment, the Indian Supreme Court (SC), in the case of Vodafone NL [341 ITR 1] ruled that, under the Indian Tax Laws (ITL), the transfer of shares of a company incorporated outside India or an interest in an entity registered outside India would not be taxable in India even if the shares or interest derive, directly or indirectly, their value, substantially, from assets located in India.1 The GOI introduced an amendment in the ITL by the Finance Act, 2012, with retroactive effect from 1 April 1962, to clarify that such transfers would be taxable2 (indirect transfer rule).

The retroactive amendment had created an atmosphere of uncertainty for the taxation of cross-border transactions. The GOI set up an Expert Committee (EC) to make suggestions to address the ambiguities and uncertainties arising from the indirect transfer rule.3 The EC, after review of the indirect transfer rule, acknowledged the complexity of the rule and recommended the need for adequate safeguards to avoid possible unintended consequences of the wide ambit of the indirect transfer rule.4 It may be noted that the GOI has yet to implement the recommendations made by the EC.

It was reported that the Tax Authority issued a notice to Vodafone NL stating that Vodafone NL was required to pay the outstanding tax demand along with interest. It was also reported that Vodafone NL was looking at a conciliation process to resolve the tax dispute in an amicable manner. As the ITL did not provide for such a mechanism, it is understood that the Ministry of Finance drafted a proposal for enabling such a conciliation process, which was sent to the Indian Union Cabinet for approval.

Indian Union Cabinet’s approval for conciliation

Reports indicate that the Indian Union Cabinet has approved a non-binding conciliation process with Vodafone NL under Indian laws (i.e., under the provisions of the Arbitration and Conciliation Act, 1996) to resolve the tax dispute. Reports also indicate that the process contemplated involves two conciliators, with the GOI appointing its conciliator on behalf of the Department of Revenue (DoR). Vodafone NL is likely to be able to appoint the second conciliator. Where there is more than one conciliator, as a general rule, they ought to act jointly.

Until the conciliation process concludes, the DoR is likely to advise the Tax Authority to keep the demand for tax, interest and penalties in abeyance.

The outcome of the non-binding conciliation process will be brought back to the Indian Union Cabinet for approval. If the outcome is amenable to both the parties, the same will be taken to the Parliament for approval. Where the outcome requires legislative changes to be made to the ITL, such changes would need to be passed by the Parliament.

Endnotes

1. See EY Tax Alert, The Vodafone case: SC rules transfer of shares of a foreign company that indirectly held underlying Indian assets not taxable, dated 20 January 2012.

2. See EY Tax Alert, Key amendments proposed by the Finance Bill, 2012 to international tax provisions of the Indian tax law, dated 16 March 2012.

3. See EY EY Tax Alert, Recent tax policy related announcements by Government of India, dated 8 August 2012.

4. See EY Tax Alert, Draft Report of the Expert Committee on Retrospective Amendments relating to Indirect Transfer, dated 10 October 2012.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Mumbai
  • Sudhir Kapadia
    +91 22 6192 0900
    sudhir.kapadia@in.ey.com
  • Hitesh Sharma
    +91 22 6192 0620
    hitesh.sharma@in.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
  • Nachiket Deo
    +020 778 30862
    ndeo@uk.ey.com
EY Solutions LLP, Indian Tax Desk, Singapore
  • Gagan Malik
    +65 6309 8524
    gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
  • Tejas Mody
    +1 212 773 4496
    tejas.mody@ey.com

EYG no. CM3506