India’s government is considering scrapping conciliation talks with Vodafone Group Plc (VOD) over a $2.2 billion tax dispute that has tarnished the country’s allure as a destination for foreign investment.
The Cabinet will consider a proposal to end the talks, D.S. Malik, a spokesman for the Finance Ministry, said in New Delhi today. He didn’t elaborate on why or when it would be taken up. The negotiations may fail because the world’s second-largest mobile-phone carrier had sought to include a separate tax clash in the discussions, CBNC-TV18 channel reported yesterday, citing sources it didn’t identify.
Companies from Nokia Oyj (NOK1V) to Royal Dutch Shell Plc are grappling with Indian tax demands, fueling concern the nation’s tax laws have become more hostile even as Prime Minister Manmohan Singh seeks foreign investment to help revive economic growth. Vodafone’s dispute dates back to the carrier’s 2007 acquisition of the Indian unit of Hong Kong-based Hutchison Whampoa Ltd., a deal on which it says no tax is payable.
“India could have done better and taken into consideration the signals this decision sends to foreign investors,” said Mukesh Butani, a partner at New Delhi-based BMR Legal, who advises multinational companies on tax disputes. “This isn’t a pragmatic or holistic decision. I don’t think either side has budged since day one of these negotiations.”
The company’s shares fell 0.1 percent to 221.35 pence at 12:42 p.m. in London. The stock price has surged about 28 percent in the last 12 months, exceeding the 5.5 percent increase the benchmark FTSE 100 Index.
The Newbury, England-based business has argued it didn’t owe taxes on the purchase of Hutchison Whampoa’s local unit because the deal took place between two overseas companies, and the target asset was registered in the Cayman Islands.
The Cabinet in June last year approved a non-binding proposal to begin a conciliation process to resolve the disagreement.
Separately, Nokia Chairman Risto Siilasmaa signaled after meeting India’s commerce minister today that his company remains unsure whether it can transfer a factory in Chennai to Microsoft Corp. because of a tax standoff. Microsoft is aiming to complete its 5.44 billion-euro ($7.4 billion) purchase of Nokia’s handset unit this quarter.
“If we are not allowed to transfer, we will have a factory, but we will not have a business,” Siilasmaa said in a transcript of his remarks released by India’s government. “And if we don’t have a business, we can’t manufacture anything in the factory. And that would be detrimental to our employees and we care deep for our employees.”
The status of the factory remains in doubt even after an Indian court in December lifted an asset freeze linked to federal tax demands on the Finnish company that could swell to as much as 210 billion rupees ($3.4 billion).
For Vodafone, India, a nation of 1.2 billion people, accounts for its biggest customer base and minutes of use and provides about 10 percent of revenue. Chief Executive Officer Vittorio Colao is counting on growth in Asia and Africa to offset price wars in Europe.
Singh’s administration earlier this month approved Vodafone’s $1.6 billion plan to buy out the local partners in its Indian unit, six months after the South Asian nation ended limits on foreign ownership in the sector.
India, the world’s fastest growing smartphone market, has become a primary destination for Vodafone’s 7 billion-pound ($11.5 billion) “Project Spring” campaign, a network upgrade funded by the company’s $130 billion sale of its stake in Verizon Wireless in the U.S.
The company is also bidding on Indian airwaves this week, including the renewal of permits slated to lapse in November in Mumbai and New Delhi.
India’s economy may expand 4.9 percent in the year through March 2014, accelerating from a 4.5 percent pace in the prior 12-month period that was the least in a decade.
Singh, facing a general election by May, has eased foreign investment limits and reviewed tax laws to try and spur growth and support the nation’s currency, which has declined about 13 percent against the dollar in the past year.
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at firstname.lastname@example.org