INDIA on Tuesday (June 4) approved moves to seek an out-of-court settlement with Vodafone to resolve a multi-billion-dollar tax dispute with the British mobile giant.
The government has been pursuing Vodafone over what it says are unpaid taxes stemming from its 2007 takeover of Hong Kong-based Hutchison Whampoa’s Indian cellular unit.
The tax battle has contributed to a souring of overseas investor sentiment toward Asia’s third-largest economy.
“We have just accepted a proposal for non-binding conciliation,” Finance Minister P. Chidambaram told reporters after a late night cabinet meeting.
“If the outcome is acceptable to the government then, it will go cabinet and thereafter to parliament for approval,” he added.
India is keen to draw more foreign investment to spur an economy that has been growing at a decade low of five per cent.
But last year, lawmakers passed legislation giving the left-leaning Congress government the right to tax merger transactions retroactively.
The measure was seen as aimed at overriding a Supreme Court ruling dismissing what was then a $2.2bn (£1.43bn) tax claim on Vodafone.
The government said later it might pursue Vodafone for $3.72bn (£2.42bn) in back taxes, interest and penalties, spooking foreign investors.
The government’s move to seek an out-of-court settlement follows recent data showing foreign direct investment (FDI) dropped by 38 per cent in the last financial year from the previous year as overseas investors gave India a wide berth.
There was no immediate comment available from Vodafone on the government’s announcement.
The dismay over the tax legislation added to investors’ unhappiness about economic policy paralysis and a slew of graft scandals besetting the Congress-led government of Prime Minister Dr Manmohan Singh.
But despite the moves to settle the tax dispute, Vodafone still faces regulatory difficulties in India.
Earlier this year, India’s government told Vodafone that its licences for three big cities cannot be extended and it will have to bid again.
Vodafone’s Indian unit, the second largest cellular company, and India’s largest mobile operator Bharti Airtel, have been at war with the government over its demand that they bid again for telecom spectrum in the three cities where they have been operating for nearly two decades.
