India's largest telecom firm will soon be born!

The onus of the tax dues of Rs 22,100 crore on Vodafone India’s British parent could also fall on the merged entity.

While Vodafone India and Aditya Birla group firm Idea Cellular are in the final stages of the proposed merger to become the largest telecom firm in the country, the onus of the tax dues of Rs 22,100 crore on Vodafone India’s British parent could also fall on the merged entity.

According to income-tax (I-T) officials, a no-objection certificate (NOC) has been issued in reply to the merger proposal of Vodafone India-Idea.

However, the NOC was given along with an explanatory remark about the outstanding tax liabilities of Rs 22,100 crore (which included interest accruing since the date of the original demand) on Vodafone group.

The remark also has a brief explanation of the tax dispute between the Indian tax authority and Vodafone Plc. Vodafone India was also told that it is an Indian subsidiary of UK-based Vodafone Plc, which has a tax dispute pending.

In an emailed response to Business Standard, a Vodafone Plc spokesperson said it was not aware of any such certificate being issued.

Queries to Idea Cellular did not elicit any response.

According to an I-T official privy to this case, the NOC was given with a caution about the pending legal status of the case.

According to him, the tax authorities have no issues with the proposed merger and hence they will not go to court against it.

However, since the outstanding liabilities were on the parent and the pre-merged entity (as Vodafone group), the same liabilities would go with the merged or combined entity, according to law.

The Vodafone spokesperson added that when Indian companies merge, the assets and liabilities of the two businesses that are combining become the responsibility of the merged company in line with general Indian legal principles and the I-T Act.

“Any such responsibilities are subject to tax indemnities/agreements between the parties.

"We have no comment to make on the agreement between Vodafone and Aditya Birla on the treatment of such assets and liabilities,” he added.

A merger or amalgamation requires an NOC from the tax department, said an I-T officer.

As the merger of any two companies transfers all the commitments and liabilities to the merged entity, the tax liability also goes on to the merged entity unless there is a specific exclusion or exemption.

He added that the law allows tax authorities to confiscate Indian assets of the entity if the tax is not paid.

At the time of the merger announcement earlier this year, Vodafone CEO Vittorio Colao had said the pending tax demand would not impact the merger as it was against the Vodafone group.

However, a tax official explained that Vodafone India would also be liable to pay the tax because it was an offshore deal involving transfer of an underlying Indian asset.

Experts said this would create uncertainly among investors of the merged entity.

“It will put investors of the combined entity in discomfort. Giving such a note with the no-objection indicates taxmen have all the right to catch the neck even if the outstanding demand is on the overseas entity,” said Amit Tandon, founder of proxy advisory firm IIAS.

On September 29, 2017, Vodafone said it had “received an electronically generated demand in respect of alleged principal, interest and penalties of Rs 19,070 crore,” PTI had reported. Last year, too, the company had received a similar notice.

The Vodafone case pertains to a Rs 7,990-crore demand raised by the government on Vodafone International Holdings for failing to deduct tax on capital gains made during its acquisition of a 67 per cent stake in Hutchison Essar.

The matter is currently under arbitration overseas, under international laws.

An international arbitration tribunal will begin trial in February 2018 on Vodafone’s challenge to India using a retrospective legislation to seek Rs 22,100 crore in taxes.

Sources said the British parent had sought advice on how to deal with the retrospective tax in case it went ahead with the merger during its initial talks with the Idea, so that these should not cloud the merger process.

Photograph: Mukesh Gupta/Reuters