New Delhi seeks $5bn from Hutchison in long-running tax dispute

Simon Mundy

AUGUST 30, 2017 by: Simon Mundy in Mumbai

India’s government has escalated its controversial fight for tax payments related to Vodafone’s investment in the country, by demanding $5bn in taxes and penalties from Hong Kong-based CK Hutchison Holdings.

UK-listed Vodafone entered the Indian market in 2007 by buying Hutchison’s 67 per cent stake in a joint venture with the Essar conglomerate. Since 2012, New Delhi has been trying to force Vodafone to pay billions of dollars in tax that it says was due on the deal, in a dispute that stoked foreign investor fears of volatile policy moves.

Now, the government is taking the fight directly to Hutchison, controlled by Hong Kong’s richest man Li Ka-shing, despite the fact that it no longer has major assets in India.

In a stock market announcement, Hutchison said it had received in February a demand from the Indian government for capital gains tax of Rs79bn ($1.2bn), plus interest of Rs164bn. It added that it had received on August 9 a further notice demanding payment of a Rs79bn penalty for the unpaid tax, indicating a total claim of Rs322bn ($5bn) — more than a quarter of Hutchison’s gross cash at the end of June, according to S&P Capital IQ.

The company said its legal advice was the claim was not enforceable, and that it would have no impact on its finances. Shares in the company have showed little reaction, rising 0.5 per cent since the announcement on Monday evening.

The dispute stems from Hutchison’s decision to invest in India through a web of entities in tax havens including the Cayman Islands and Mauritius. This allowed it to avoid paying capital gains tax when it sold the underlying telecom business to a Vodafone subsidiary based in the Netherlands.

New Delhi argued that tax should have been paid since the underlying asset was in India, even if the transaction was conducted among offshore entities. Soon after its claim was dismissed by the supreme court in 2012, the government introduced a new law to “clarify” that transactions of this nature were taxable — with retrospective application to all cases from the previous 51 years.

The move dismayed investors who complained that retroactive legislative changes would make India seem a dangerously unpredictable place to invest.

Prime minister Narendra Modi has promised that such moves would be “a thing of the past” under his government, but New Delhi continues to pursue the claim against Vodafone, which it says should have withheld tax when making its payment to Hutchison. Vodafone has been pursuing an international arbitration ruling against the tax claim for more than five years. The finance ministry declined to comment.

Analysts have seen the dispute as a damaging distraction for Vodafone, which is also contending with a fierce telecom price war instigated by new entrant Reliance Jio. In March Vodafone announced a proposed merger of its Indian unit with rival Idea Cellular, having taken a €6.3bn writedown on the business four months earlier.

London-listed oil explorer Cairn Energy is locked in a similar fight with New Delhi, which is seeking a $1.6bn tax payment related to the restructuring of Cairn’s Indian assets in 2006. In June, the government said it would seize $104m in dividends owed to Cairn by Indian group Vedanta Resources, as well as withholding from the UK company a tax rebate of $250m.

 

Posted On: Sunday September 3, 2017

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