Vodafone (LSE: VOD) (NASDAQ: VOD.US) is currently locked in a multi-billion pound dispute with the Indian government. If Vodafone is forced to cough up, the company could be forced to pay $2.6bn, or £1.5bn in “capital gains tax”.
One-off tax
I say “capital gains tax” as the tax demand is more of a fine than anything else. The tax stems from Vodafone’s 2007 acquisition of Hutchison Whampoa, an Indian mobile operator.
The $10.9bn deal was designed to expand Vodafone’s presence within India and initially, all seemed to be going well. Indeed, India’s Supreme Court ruled that the group had no capital gains tax liability to pay back during 2014.
However, after this ruling, Indian policy makers pushed through a bill retroactively changing the tax law. In addition, the new law allowed the reopening of closed cases, including the one against Vodafone.
Changing of the guard
Many companies had hoped that India’s new government, led by Prime Minister Narendra Modi, which has given priority to kick-starting India’s economy, would have repelled the retrospective tax law.
Nevertheless, a speedy resolution does not appear to be on the cards. When the new government unveiled its maiden budget, finance minister Arun Jaitley gave no indication that the government would be changing its position on the matter. Further, the minister affirmed New Delhi’s right to pass retrospective legislation, opening the door to further retrospective tax laws.
Mr Modi himself has weighed in on the matter, stating that the long running battle should reach its “logical conclusion” as soon as possible. So, Vodafone has decided to seek international arbitration in the dispute.
Unfortunately, this dispute risks damaging Vodafone’s reputation within India, a country key to the company’s growth, which could be a costly mistake.
What’s more, whatever the outcome of this dispute, Vodafone is facing hefty legal bills, or a hefty tax charge. As Vodafone is currently struggling to turn its fortunes around, this costly dispute comes at a bad time.