The government will take a final decision on the withdrawal of conciliation process with Vodafone Plc on tax issue worth Rs 200 billion after the transfer pricing matter is resolved, says, news reports.

The government’s decision has come in wake of the Ministry of Finance’s proposal to withdraw from reconciliation talks with the operator. Both the government and the Ministry of Finance have agreed to work towards an early resolution of the tax issue which is pending before the Income-Tax Appellate Tribunal (ITAT). The government is of the view that a final decision on the withdrawal of reconciliation talks should be taken once the tax cases against the operator are settled.

The Income Tax Department of India has issued two notices to Vodafone India – one is regarding the capital gains tax dispute regarding the acquisition of Hutchison Whampoa’s stake in Hutchison Essar by Vodafone in 2007. And the second notice relates to the Rs 37 billion transfer pricing dispute over Vodafone India Services (P) Limited.

The latter is pending before the ITAT, which in December 2013 had stayed the tax claim by the Income Tax Department of India and had asked Vodafone India to deposit 2 billion as initial payment and submit bank guarantees for the remaining sum. The tribunal will hear the case from March 19, 2014 onwards.

Earlier in February 2014, the Ministry of Finance had circulated a draft Cabinet note seeking withdrawal of the conciliation talks after Vodafone Plc demanded that the Rs 37 billion transfer pricing matter be clubbed with the capital gains tax case. The move came in the wake of a notice under Bilateral Investment Promotion and Protection Agreement by Vodafone International Holdings BV to the Government over the tax dispute. The company claimed that the amendment to the IT Act will cause Vodafone International Holdings substantial financial losses.

The Cabinet had in June 2013 approved a proposal from the Ministry of Finance to pursue conciliation talks with Vodafone Plc to resolve the capital gains tax dispute regarding the acquisition of Hutchison Whampoa’s stake in Hutchison Essar. While the basic tax demand for the 2007 acquisition stands at Rs 79.9 billion, the outstanding dues, including a penalty of the same amount and accrued interest is over Rs 200 billion.

In 2012, the government made amendments to IT rules to enable it to make retrospective tax claims on concluded deals.