The Union Cabinet today approved a proposal for conciliation with British telecom company Vodafone on their Rs 14,000-crore tax dispute.

Officials said conciliation will pave way for amendments to theIncome Tax Act. This will be needed to have a uniform law for all companies facing similar tax demands from the government.

Government may also consider amendments to Arbitration and Conciliation Act as the law of the land does not provide for conciliation talks between a company and the sovereign state.

In January last year, Vodafone won a legal battle against the government when the Supreme Court ruled that it did not need to pay taxes because the transaction took place between two overseas firms and there was no provision in Indian law to tax such deals. However, the government brought retrospective amendments in the Income tax Act in 2012 to tackle Vodafone like cases.

After the Finance Act was notified, the Income Tax department sent a notice to Vodafone asking to pay Rs 14,000 crore, including an interest of Rs 6,000 crore. There is a provision of imposing penalty of 100% of the tax demand, which will be Rs 7,900 crore in this case.

Officials agree that interest and penalty should not be levied if there is a retrospective amendment. So if the government is going for conciliation, it may be looking at providing clarification in the Income Tax Act or through a circular that penalty and interest would not apply in such cases. Without waiver in the penalty and interest, the company would have to cough up about Rs 22,000 crore.

Kapil Sibal, after taking charge as Law Minister recently, overturned his predecessor Ashwani Kumar’s decision that conciliation with the British company was not possible under the current law and “At the inception, the negotiation is illegal”.

Sibal, on the other hand, argued that there was nothing illegal about a negotiation which the Cabinet and Parliament clear.

In 2007, Hutchison sold its stake in Hutch Essar to UK-based Vodafone. As the Hong Kong based entity has no presence in India now, the tax department sent a notice to Vodafone treating it a representative of Hutchison in India. It said Vodafone failed to withhold tax while making payment to Hutchison. (Business Standard)