June 5 (Bloomberg) -- Indian Prime Minister Manmohan Singh’s Cabinet approved a non-binding proposal that would start a conciliation process to resolve a $2.2 billion tax dispute with Vodafone Group Plc.
The decision is the first step toward a resolution which will need parliamentary approval, Finance Minister Palaniappan Chidambaram told reporters in New Delhi yesterday. Ben Padovan, a Vodafone spokesman, declined to comment on the Cabinet plan.
Vodafone, which has expressed willingness to settle the claim if it isn’t liable for interest, has invested at least 513 billion rupees ($9.1 billion) in the fastest-growing mobile market, including buying wireless airwaves. The dispute dates back to the Newbury, England-based carrier’s 2007 acquisition of the Indian unit of Hong Kong-based Hutchison Whampoa Ltd. Vodafone has argued it didn’t owe taxes in India because the deal took place between two overseas companies and the target asset was registered in the Cayman Islands.
“You’re jumping the gun,” Chidambaram said when asked whether Vodafone would be exempted from paying interest on the tax. “It is in India’s interest to resolve this matter.”
India must amend its laws and again seek the Cabinet’s confirmation, while Vodafone may require board approval, before the dispute can be resolved, Chidambaram said.
In 2011, Vodafone said it may consider an initial public offering of its India venture after resolving the tax dispute. The company is the largest foreign direct investor in India, according to data compiled by Bloomberg.
Vodafone shares slipped 0.4 percent to 191.25 pence at 9:09 a.m. in London. The stock gained 24 percent this year through yesterday.
“It’s a good thing: they can look at India from a longer-term perspective, maybe resulting in that IPO they’ve been planning for so long,” said Harit Shah, a Mumbai-based analyst with Nirmal Bang Equities Ltd. “This is just a start. Hopefully the process will continue through its logical conclusion.”
The decision could amount to a partial reprieve for Vodafone, Shah said. The company is the world’s second-largest wireless carrier, behind China Mobile Ltd.
After defeating the government’s initial demand in January 2012, Vodafone received another bill following an Indian amendment to retrospectively tax cross-border transactions dating back to April 1, 1962.
Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd., a Cayman Islands company controlled by Hong Kong-based Hutchison.
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