Negotiations are continuing between the Vodafone Group plc (NASDAQ:VOD) (LON:VOD) and the Indian government over taxes owed from a 2007 acquisition made by the telecommunications giant. The finance ministry claims the company owes as much as $3.7 billion in back taxes and fees relating to the deal.
In 2007 Vodafone purchased a majority stake in Hutchison Essar. At that time it was the third largest private mobile carrier in the country. The deal which cost Vodafone $11.1 billion valued the telecommunications firm at $19.3 billion. Vodafone did not pay the full tax on the deal according to the Indian government as it demands the entire amount from the firm.
Vodafone has argued that since the acquisition was not of an Indian owned company, Hutchison Essar was owned by the Hutchison Whampoa Limited (HKG:0013) based in Hong Kong, the deal did not take place in Indian juristiction and so the company was not liable to pay the taxes. The government disagreed and despite a Supreme Court decision agreeing with Vodafone the country is still demanding its money.
It would appear to be an open and shut case from there on out but things are not that simple in India. The government has come up with a plan that would see the company liable for the taxes by changing the law on the subject.
The Finance Minister has now opted to introduce legislation that would retroactively make the company liable for the payment of the taxes. At the moment the company does not legally owe the country anything. When the legislation is put into force there will be $4 billion gone from the company’s coffers.
Though this amount will surely not bankrupt Vodafone it casts an ominous shadow on India’s relationship with business. If, in order to collect a large windfall, the country’s politicians and bureaucrats are willing to spend countless hours changing the law of the land then it could not be seen as a friendly place to do business. Vodafone’s experience could serve as a warning to other large companies as India tries to develop into a more mature economy.
Vodafone is not the only telecommunications corporation having trouble with the Indian government of late. Research In Motion Limited (TSE:RIM) (NYSE:RIMM) have faced a backlash over investigations into servers it uses to ensure security on its Blackberry Management service. The firm is being asked by the Indian government to allow interception of its data flows in order to investigate criminal activity. The news that the famously secure data system is compromised does nothing for the firm’s reputation in its last bastion of success.
On a related note, we earlier mentioned Vodafone’s potential problems in Egypt. As the situation continues to deteriorate, Vodafone is facing problems in another large emerging market.