Government-Vodafone talks focus on interest waiver

Government-Vodafone talks focus on interest waiver



NEW DELHI: Finance ministry officials, led by revenue secretary Sumit Bose and Central board of Direct Taxes head Poonam Saxena, held a first round of talks with representatives of Vodafone Plc in an attempt to resolve the long-running tax dispute that has cast a shadow over India's investment climate. 

There was no formal statement on what transpired at the meeting but sources close to the negotiations said that the discussions were focussed on waiver of interest imposed on the tax demand. 

One person aware of the discussions said the basic or the principal tax amount was also the subject of negotiations and could also be reduced. A final outcome was yet to be arrived at, these sources pointed out. 

Indian Tax authories have imposed a tax liability of Rs 7,899.9 crore on Vodafone for what they term as the failure to deduct tax on its $11 billion payment for the Indian telecom business of Hutchison Telecommunications International in 2007. 

The interest liability on this comes to Rs 6,252 crore. Of this, 3318 crore is on account of the company 'failing' to pay tax when it became due till a formal demand notice was issued on October 22, 2010 while the balance is interest on the total outstanding as on date. 

These liabilities have been imposed on the company under various sections of the Act. If the government waives off both interest and penalty, the latter for not deducting tax, Vodafone's tax liability will fall to a little less than Rs 8,000 crore. 

Vodafone had acquired Hutchison Essar in 2007 from Hong Kong based Hutchison Whampoa through a $11.2 billion overseas transaction. Indian income tax authorities slapped a Rs 20,000 crore tax including penalty on the company. 

But of this, the penalty amount is almost certain to be waived, a person close to the discussions said, and the talks would focus on the interest component. The person declined to be named because of the sensitivity of the matter. 

Vodafone's formal position, which it reiterated a few days back in response to a so-called 'reminder notice' from the tax authorities, is that no tax is payable. 

In January last year the Supreme Court had had set aside the tax demand but the government amended the Income Tax law retrospectively in the budget making the company liable to pay tax. The move evoked condemnation from foreign investors, domestic industry and also foreign governments. 

The Indian government subsequently referred the issue to a panel headed by Parthasarathi Shome, who is now P Chidambaram's advisor. Policymakers within the government are now keen to revive business confidence and send out strong signal to foreign investors that the country believes in stable and non-adversarial tax regime. Both Prime Minister Manmohan Singh and finance minister P Chidambaram have made promise on this count in the past. 

The CBDT has the power to waive penalty and interest, and has in the past used these powers. It has also allowed payment of tax in installments in some cases when the law was retrospectively changed. 

The Shome panel has also favoured such a move. The committee said the tax should be applied prospectively, and if that is not possible at least the interest and penalty amount should be waived off. 

The CBDT however, did not favour the panel's recommendations except the waiver of penalty.

Gold gluttons would keep gorging through duty hike

 India's passion for gold is putting such a strain on state finances that the government may slap higher import taxes on the precious metal, but demand buoyed by heady inflation and meagre savings will blunt the impact of any rise in duties.

Initial success from a tax hike in March last year was stifled by the arrival of major festivals such as Diwali, when gold is a must-give present, and the winter wedding season.

That has scuppered New Delhi's goal of reining in spending on gold by around a third to $38 billion in the fiscal year that ends in March, prompting Finance Minister P. Chidambaram to say another tax increase could be on the cards.

But market participants say that would do little to dull gold's lustre for most Indians, especially with bullion prices heading north.

And the finance ministry would ideally like imports to be around $30 billion, an economic adviser there has told Reuters, with industry experts dismissing this as little more than wishful thinking.

India is challenged only by China in its appetite for gold, and with nearly all demand covered by imports, the country's purchases are a major factor in global prices.

The latest figures show the volume of imports jumped 48 percent in July-September from the quarter before and were only 8 percent down on 2011.

"It is the disease that needs to be cured rather than the symptom," said Munish Dayal, a partner at Baring Private Equity Partners India Limited.

With inflation above 7 percent and the Reserve Bank of India keeping key rates at 8 percent, it's no wonder that a 13 percent rise in domestic gold prices in 2012 looked attractive to so many.

Add to that a near total lack of banking facilities in rural areas, where about 69 percent of the 1.2 billion population lives, and it's easy to see why Indians would rather invest in bangles than bonds.

India wants to reduce gold's share of its import bill from 11.5 percent -- the second-highest outlay after oil.

The petroleum bill, while inflated by subsidies, is largely unavoidable for such a huge economy that imports 80 percent of its oil needs and is growing around 5.5 percent a year, but the government sees money tied up in gold as dead investment.

GRAPHIC on India gold import volumes link.reuters.com/syd25t

GRAPHIC on inflation, gold imports link.reuters.com/waf25t

GRAPHIC on trade balance, gold imports link.reuters.com/qyd25t

PORTABLE DOWRY

Jewellers Gitanjali Group, which bills itself as a $2.5 billion multinational and features Bollywood movie stars Shah Rukh Khan and Kareena Kapoor in its adverts, writes off the duty hike, which a senior finance ministry official said could be to 5 or 6 percent on standard gold bars from 4 percent now.

"A duty hike of 1 to 2 percent won't make any difference ... It won't impact our sales at all," said the firm's head, Mehul Choksi.

And entrenched traditions will ensure gold's appeal remains strong.

The winter wedding season is in full swing and parents will snap up gold to shower their daughters, to show off their wealth and give her the traditional portable dowry as she moves into her husband's house.

"We will have to buy gold for weddings despite duty hikes as we have to stick to the customs followed by our great-grandfathers," said 52-year old Ramesh Madhani, eyeing jewellery in Mumbai's chaotic Zaveri Bazaar, India's biggest gold market.

The threat of more expensive imports has sent buyers into a frenzy, with traders estimating 40-50 tonnes of gold could have been imported in the first week or so of January -- nearly a month's worth in just a few days. That is despite near record-high domestic prices above 30,000 rupees per 10 grams.

The spurt could be nipped by a duty hike, but demand should bounce back, particularly with spot gold currently around $1,670 an ounce after gaining 6 percent in 2012, its 12th straight year of gains and one of the longest bull runs ever in a commodity.

Akshaya Tritiya, one of the biggest festivals for giving gold, will spice up buying further in early May.

SQUIRRELING, SMUGGLING

The fundamentals supporting demand have helped spur Indians to squirrel away 20,000 tonnes -- about three times the holdings of the U.S. Federal Reserve -- in jewellery, bars and coins.

Only a tiny fraction of this has been tempted out by high prices and hiked import duties to be recycled, which can mean anything from turning grandma's lobe-lengthening earrings into fashionable nose rings or trading in "imitation" coins often used as a kind of gold gift voucher.

Attempts by the government and the RBI to encourage use of alternative investments such as gold bonds, deposit schemes and gold-based funds have gained little traction.

Hoisting the import duty on gold also has the side-effect of increasing smuggling, which government officials say has grown three-fold since the tax was last raised.

But Chidambaram may have few other politically palatable options to handle the record current account deficit -- which hit 5.4 percent of gross domestic product in the September quarter -- ahead of an election likely in 2014.

Maruti, Hyundai to raise prices

Maruti, Hyundai to raise prices

NEW DELHI: Car companies are finally ready to bite the bullet as they will increase prices from this month to factor in higher manufacturing costs. Market leader Maruti Suzuki said it will increase prices of its models by up to Rs 20,000. Others like Hyundai and General Motors also said they will also increase prices across product lines to make up
for higher costs.

"The price hike across all models will come into effect from Wednesday," Maruti Suzuki India chief operating officer (marketing & sales) Mayank Pareek said. He said the hike has been necessitated due to increasing pressure on margins following adverse currency fluctuation. Last month, the company had announced that prices will go up by between 1% and 3%.

Hyundai, the second-biggest passenger vehicle maker, also said prices will go up by a maximum of Rs 20,000 and this will happen around the month-end. "The promotion offers have been reduced in January. Also, on account of pressures on margins due to increase in raw material costs and fluctuation in currency, we will increase prices latest by February 1 across all models starting from the Eon mini car to the Santa Fe SUV," Rakesh Srivastava, VP (sales & marketing), said.

General Motors also said prices will go up soon. "We have not yet decided, but will do so soon. The hike will be across products and will be between 1% and 3%," P Balendran, VP at GM India, said.

Industry analysts said companies had been going soft on increasing prices as the car market is in a slowdown mode and higher prices can further dampen customer sentiments. However, some of them had already increased prices. These include Renault and Honda. Renault raised prices by up to 1.5% across its range, starting from January 1. These included its popular SUV Duster.

"We have to follow suit with the rest of the industry as input costs have gone up tremendously. We tried to absorb the increase as much as possible but now we are forced to pass on some of the burden to our customers as high input cost coupled with high inflation are eating into our bottom line," Sumit Sawhney, executive director (sales & marketing) at Renault India, said.

India Growth Rebound Faces Inflation Crimping Rate Cuts: Economy

Indian economic growth may rebound in 2013 while falling short of the government’s 8 percent target, as inflation risks limit the extent interest rates can be lowered to spur consumption and investment.

Gross domestic product in Asia’s No. 3 economy will rise 6.5 percent in the year through March 2014, according to the median of 30 estimates in a Bloomberg News survey. That compares with a 10-year average of 7.8 percent and the Finance Ministry’s projection of 5.7 percent to 5.9 percent in 2012-2013.

Prime Minister Manmohan Singh revived stalled policy overhauls in September to stem a slowdown in expansion, steps that helped send stocks to a two-year high this week on bets that a recovery has begun. While inflation eased to a three-year low of 7.18 percent in December, it remains the fastest among the biggest emerging markets. A record current-account gap is threatening to damp the rupee, adding to price pressures.

“The recovery is going to be a bit slow,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai, who has covered the Indian economy for a decade. “Sentiment has picked up in the financial markets, but things have yet to pick up in the real economy.”

The BSE India Sensitive Index (SENSEX) rose 0.4 percent yesterday to the highest level since January 2011. The rupee, down 5.9 percent against the dollar in the past 12 months, weakened 0.2 percent to 54.625. The yield on the 8.15 percent bonds due June 2022 climbed to 7.83 percent from 7.80 percent.

Ratings Risk

India’s current-account deficit swelled to $22.31 billion in the quarter ended Sept. 30, and the rupee’s decline against the dollar in the past three months makes it the worst performer after the yen among 11 Asian currencies tracked by Bloomberg.

The Reserve Bank of India will probably limit its rate cut at the Jan. 29 review to a 25 basis-point reduction in the repurchase rate to 7.75 percent, 13 of 16 analysts said in a Bloomberg News survey. The rest expect a cut to 7.5 percent. Fifteen of 21 economists in another survey see the rate ending the second quarter at 7.5 percent or higher.

Inflation remains “quite high” even after easing from a peak and economic growth remains a concern, Reserve Bank of India Governor Duvvuri Subbarao said yesterday. The scope for both monetary and fiscal stimulus is limited, he said.

Singh has opened industries including retail and aviation to more overseas investment since September, set up a panel to speed up infrastructure projects and delayed tax changes that threatened to deter inflows.

His government last month set a target of 8 percent annual expansion in the five fiscal years through March 2017, lowering an earlier goal of 8.2 percent.

BRIC’s Widest

The Finance Ministry has pledged to reduce India’s budget shortfall, the widest in the BRIC group of major emerging nations that also includes Brazil, Russia and China.

Standard & Poor’s and Fitch Ratings warned last year that they may strip India of its investment-grade credit rating, which would hurt the country’s ability to raise funds.

“There are emerging signs that growth has bottomed out in India, though the cyclical upturn will lack momentum in the absence of structural improvements,” said Radhika Rao, a Singapore-based economist at Forecast Pte. There is an “urgent need to address the fiscal and current-account deficits, which pose substantial risks to long-term growth and macroeconomic stability,” she said.

Renewed Pressures

India’s financial system has been made vulnerable by a deterioration in bank assets and a lack of capital as the economy slowed, according to the International Monetary Fund. The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity, even as stress tests have shown the risks are “manageable” for now, it said in a statement this week.

India’s potential growth rate may have fallen to about 7 percent, the Reserve Bank said last month, compared with 8.5 percent before the onset of the global financial crisis. China’s GDP has climbed an average annual 10.6 percent in the past 10 years.

“The realization over the past two years is that India is probably not going to be the next China,” said Glenn Levine, an economist at Moody’s Analytics in Sydney, who has covered the Indian economy for four years. “It does require a concerted and sustained reform and pro-business policy from the government, and there is little evidence based on the past five years that they are able to implement such a policy.”

Foreign-direct investment fell 42 percent to $14.8 billion in the seven months through October compared with a year earlier. Still, offshore funds poured a net $24.5 billion into domestic shares last year, as the policy push since September encouraged bets that the worst of India’s slowdown has passed.

Adding Pressure

The Finance Ministry’s projected expansion of as little as 5.7 percent in the 12 months to March 31 would be the weakest in a decade. More than two-thirds of India’s 1.2 billion people live on less than $2 per day, according to the World Bank, adding pressure for faster growth.

Elsewhere in Asia, Japan’s machinery orders rose more than expected in November, suggesting that companies are optimistic about the economic outlook. China is due to release foreign direct investment data.

A release on euro-area inflation today may show that consumer-price growth held at 2.2 percent in December, the same level as in November.

In the U.S., a report may show consumer prices were unchanged in December from the previous month. Industrial production rose 0.3 percent in December after a 1.1 percent gain the previous month, the best back-to-back readings in a year, according to a Bloomberg survey.

Sanjay Kapoor, Bharti’s India & South Asia CEO, quits

Sanjay Kapoor, Bharti’s India & South Asia CEO, quits

NEW DELHI: In a surprise move, Bharti Airtel, the country's largest mobile operator, announced the exit of Sanjay Kapoor, its CEO for India and South Asia, after a 15-year stint with the company. Gopal Vittal, who rejoined Airtel last April as group director, special projects, has been appointed the CEO for India operations and will report to Sunil Bharti Mittal, Bharti Airtel's chairman & managing director.

The changes come amid reports of Bharti planning a reorganization of its top deck. which currently has Kapoor as the head of India andSouth Asia operations, while Manoj Kohli, who is CEO and joint MD, handles the international operations. After Kapoor's departure, the South Asia portfolio, including Bangladesh and Sri Lanka, will shift to Kohli.

Kapoor will continue as a director on the Board of Indus Towers and Bharti Global. "Sanjay will continue in his current role until February 28, 2013, and will be available to assist on key matters until March 31, 2013 ensuring a smooth transition process," Bharti said in a statement. Vittal is also no stranger to Bharti, which is now focusing on increasing revenues from data services with the launch of 3G and 4G services. "Key focus areas for Gopal would be enhancing market share and margins, along with growth of alternate revenue streams, including 3G, Data, Airtel Money and value added services," the statement added. Earlier, he was director-marketing at Airtel and spent 20 years atHindustan Unilever.

Bharti Airtel was the top gainer among the 30 sensex stocks rising 4.8% to close at Rs 345 on BSE. Telecom shares rose on Tuesday amid reports that they may increase tariffs, with Idea leading the surge with an 8% gain.