Conciliatory talks between the Indian government and the second largest mobile phone operator in the country, UK-based Vodafone, to settle a $2.2bn tax liability have failed. The talks were aimed at settling taxes that the government claimed were due from Vodafone’s offshore acquisition of Hutchison Whampoa’s controlling stake in Hutchison-Essar in India in 2007. Vodafone has consistently stated that the transaction was not taxable, and was even backed by India's Supreme Court, which ruled in its favour in early 2012. Later that year, the Indian government changed the rules to enable it to make retrospective tax claims on already-concluded deals. 

This development comes at a time when Vodafone is shoring up its competitive position in India. It has secured the government’s permission to invest $1.6bn to buy out local partners to fully control its local venture, Vodafone India Ltd. Recently, it also invested about $3bn to protect its interests in New Delhi, Mumbai and Kolkata. Notwithstanding the tax dispute, Vodafone's group CEO, Vittorio Colao, has stated that the company will invest $3bn over the next two years towards network expansion in rural India. 

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Talk of conciliation between Vodafone and the Indian government has been in the air since 2013, especially after the Income Tax Department slapped a tax demand on Vodafone International Holdings BV in January 2013. Vodafone’s stance is that it does not owe anything to the government. India’s finance minister told the Financial Times in January that Vodafone wrote to him proposing discussions to solve the issue. Vodafone’s preference is for conciliation under the United Nations Commission on International Trade Law, with negotiations conducted outside India. The Indian government preferred a non-binding conciliation under the domestic Arbitration & Conciliation Act of 1996.

There are other factors that have also cast a shadow over the conciliation process. There have been suggestions in India’s business press that Vodafone sought in vain to widen the scope of the conciliation talks by including a transfer pricing dispute that it has with the Indian government. More importantly, while the scrapping of the retrospective tax amendment would have clearly sent the right signals, the government was not in a position to push it through parliament last year. With national elections due in April, the Vodafone issue will be a problem for the next government to tackle.

What are Vodafone’s options? It can take the matter to arbitration. This is what it wanted to do when the retrospective tax amendments were implemented. It can also take the legal route by contesting the recovery amount on account of both capital gains and transfer pricing. The last option is to talk again to whichever government comes to power after the elections. This is perhaps the best option considering the high stakes that Vodafone has in India.

N Chandra Mohan is an economic and business commentator based in New Delhi.