In less than 24 hours of taking over the additional charge of law Ministry, lawyer-turned-politician Kapil Sibal has reversed the decision of his predecessor Ashwani Kumar and initiated a move for a conciliatory out-of-court settlement with British telecom major Vodafone in a Rs11,000 crore tax dispute.
Attorney General GE Vahanvati prepared the way for reversal of Ashwani Kumar’s decision.
Interestingly, when Ashwani Kumar rejected the Finance Ministry’s proposal for conciliation with Vodafone, Vahanvati had advised against a compromise (with Vodafone).
Kumar had opposed conciliation, as proposed by Vodafone, saying the Executive cannot overturn an Act of Parliament. The AG had then concurred with Kumar's view.
It is learnt that soon after taking over as law Minister, Sibal sought the fresh opinion of the AG, who gave a nod for conciliation of the tax dispute as was proposed by Vodafone.
Vahanvati has reportedly defended his new position claiming it was based on Finance Minister P Chidambaram’s clarification at meeting with the Revenue Secretary and the Chairperson of the Central Board of Direct Taxes (CBDT) that the conciliation proposal would not bypass or alter the tax liability under the Income Tax Act.
In his opinion, the AG quoted Chidambaram as claiming that permission of the Cabinet was being sought for a non-binding conciliation only to discuss issues with Vodafone and has assured that no contract would be signed outside the provisions of the law. The out-of-court conciliation with Vodafone will now come up before the Cabinet to take the final call.
Vodafone is facing a tax liability of over Rs11,217 crore for purchase of Hong Kong-based Hutchison Whampoa's stake in Indian telecom business Hutchison Essar in 2007.
The tax liability arose after then Finance Minister Pranab Mukherjee amended the Income Tax Act of 1961 to undo the relief that Vodafone had got from the Supreme Court in the tax case. The amendment in the Act provided for taxation of Vodafone with retrospective effect. Accordingly, a demand notice was served to Vodafone asking the British Telecom giant to pay about Rs 11,217 crore.
Taxation of Vodafone with retrospective effect did not find favour with Chidambaram, who is of the opinion that such a provision would act as a deterrent to foreign investments and hit the growth process.