Telecom Lead India: The Union Cabinet on Tuesday cleared a conciliatory out-of-court settlement in the Vodafone tax dispute case that has the potential to take a Rs 14,200 crore hit on the profit of the European mobile giant.

The Cabinet approval will pave way for discussion between Vodafone plc of the U.K and the government authorities.

The result of the discussion may take a hit on the bottom line of Vodafone plc that faces Rs 14,200 crore tax obligation, including penalty, in India.

When contacted, Vodafone spokesperson in London said the company does not want to comment on the settlement issue at this stage.

READ Baburajan K’s Telecom Blog: Indian mobile industry should congratulate Kapil Sibal for his latest initiatives to solve the Vodafone tax issue.

During the Q4 result, Vodafone said it is exploring with the Indian Government whether a mechanism exists under Indian law which would allow the parties to explore the possibility of a negotiated resolution of this dispute, but there is no certainty that such a mechanism exists or that a resolution acceptable to both Vodafone and the Indian Government could be reached.

On 3 January 2013, Vodafone had received a letter from IT department reminding it of the tax demand raised prior to the Indian Supreme Court judgment and purporting to update the interest element of that demand in a total amount of Rs 14,200 crore (£1.6 billion).

On 14 May, the law ministry – headed by telecom minister Kapil Sibal — based on the Attorney General’s advice gave its green signal for the out-of-court settlement.

Kapil Sibal had maintained that the case will be solved as per the current law.

Attorney General GE Vahanvati, who was earlier not in favor of settlement, gave his consent to the law ministry.

The Attorney General is believed to have changed his opinion in the light of a Finance Ministry clarification that the conciliation proposal would not bypass or alter the tax liability under the Income Tax Act.

Though the British telecom giant had won a tax case in the Supreme Court in January 2012, the government had amended the Income-Tax Act with retrospective effect to undo the ruling.

Following that, the Income Tax Department issued a letter in January to Vodafone International Holdings stating that the company is required to pay tax demand of about Rs 11,217 crore along with interest.

The telecom giant Vodafone replied saying they do not owe anything to the Indian government. Vodafone earlier wanted to take India to international arbitration but later offered conciliation on the issue.

Vodafone faces the tax liability for the purchase of the Hong Kong-based Hutchison Whampoa’s telecom business which involved stake in its Indian venture, Hutchison Essar, in 2007.

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