New Delhi: India said it may seize Vodafone Group Plc.’s assets in the country if the company doesn’t pay a disputed ₹ 14,200 crore tax bill that’s still under international arbitration proceedings, according to a copy of a notice sent to the company this month.

The development, which flies in the face of government assurances that India will pursue non-adversarial tax policies, will likely stir renewed concern among investors.

Weeks ahead of the Union budget, it is also expected to exert pressure on the government to do away with the retrospective amendments to tax laws through legislative changes, although the government has affirmed that all legacy cases should be settled in the courts.

Anil Sant, deputy commissioner of income tax, informed Vodafone International Holdings BV of its dues in a letter dated 4 February, according to the notice, a copy of which was seen by Bloomberg News.

Any overdue amounts, even from overseas companies, may be recovered “from any assets of the non-resident which are, or may at any time come, within India", according to the letter.

While confirming the notice, Vodafone, in a statement, questioned the Narendra Modi government’s promise of a tax-friendly environment for investors.

“We can confirm that we have received a tax reminder from the Tax Department that also references asset seizures in the event of non-payment. This dispute is currently the subject of international arbitration. The Indian government stated in 2014 that existing tax disputes, including ours, would be resolved through existing judicial process. In a week when Prime Minister Modi is promoting a tax-friendly environment for foreign investors this seems a complete disconnect between government and the Tax Department," the firm said.

Vodafone and the Indian government were also exploring the possibility of conciliation.

The longstanding dispute between the tax department and Vodafone marred India’s image both internationally and locally as an investor-friendly country.

It has again surfaced at a time when the government is trying to attract foreign investors to invest in India with a Make in India event in Mumbai showcasing the country’s manufacturing capabilities.

It also comes close on the heels of the tax department deciding to extend a freeze on UK’s Cairn Energy Plc. selling its remaining 9.8% stake in Cairn India, an erstwhile subsidiary that was purchased by Vedanta Resources Plc. for $8.7 billion in 2007. Vedanta retained Cairn India’s name after the transaction. A spokesperson for Cairn Energy Plc. confirmed the development.

The tax demand is on account of the alleged capital gains arising from the 2007 deal in the hands of Cairn UK Holdings, the erstwhile parent of Cairn India. Cairn India, too, has been served a tax notice, a dispute over which is pending in the Delhi high court.

The ₹ 20,494-crore tax demand comprises ₹ 10,247 crore of principal tax and an identical amount as interest. Cairn Energy Plc. has also initiated international arbitration under the India UK Bilateral Investment Protection agreement.

Though the Modi government has reiterated its commitment of providing a predictable and stable tax regime to investors, its inability to address these legacy issues inherited from the Congress-led government through amendments to the income-tax Act has left investors disappointed.

“This is an unfortunate development. It is an antithesis to the government’s position on ease of doing business and providing tax certainty to investors," said Sudhir Kapadia, national tax leader at EY India. “If the government’s position is that it does not want to remove the retrospective amendment through legislative changes since the matter is sub-judice, it should have decided to keep the tax demand in abeyance till the international arbitration proceedings are going on," he said.

Surabhi Sinha, member, Central Board of Direct Taxes (CBDT), said the department was strictly adhering to the regulations. She said the government was keen to have a predictable and stable taxation regime as envisaged by Prime Minister Narendra Modi.

She declined further comment on the Vodafone matter.

Minister of state for finance Jayant Sinha did not respond to e-mails and messages seeking comment.

Revenue secretary Hasmukh Adhia tweeted: “The notice in Vodafone case is a routine exercise of sending collection notice to all those whose dues are not stayed by any court. The party can always approach assessing office with a request to stay the demand as per law. In case assessing officer does not agree, party can go to next higher authority and get a stay."

“As per the procedure laid down in law, the assessing officer (AO) has no option but to press for recovery of dues. The AO cannot drop recovery proceedings just because Vodafone has initiated arbitration proceedings. Vodafone will have to approach a court and inform the court about the arbitration proceedings and seek a stay order on recovery from the court," said B.M. Singh, former CBDT chairman.

Vodafone has been fighting Indian tax authorities for years over its purchase of billionaire Li Ka-shing’s mobile-phone business in the country during 2007 in a case that analysts have said may influence foreign investors’ perceptions about India.

It’s not immediately clear what the government’s next steps would be if Vodafone were to decline the payment request.

In 2007, Vodafone paid $11 billion to acquire A 67% stake in the mobile-phone business owned by Hutchison Whampoa, now part of CK Hutchison Holdings Ltd. While Vodafone has said it doesn’t owe the Indian government money because the transaction was conducted offshore, Indian authorities have sought to collect taxes on the deal because it involved assets in the country.

Vodafone, the second-largest mobile carrier in India, began international arbitration proceedings on the tax bill in 2014 after the Indian government brought in retrospective amendments to tax laws to ensure that transactions like that between Vodafone and Hutchison get taxed in India.

It also brought in a validation clause to ensure that this amendment overrides the Supreme Court judgement in 2012 which was in favour of Vodafone. It’s the biggest of three disputes Vodafone has had with India’s government under Modi’s predecessor Manmohan Singh.

The other disputes involved the valuation of international transactions—a case that Vodafone won at the Bombay high court—and a separate ruling in October, whereby the court ruled that Vodafone didn’t owe ₹ 8,500 crore in back taxes. BLOOMBERG

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Remya Nair is with Mint. Mint’s Gireesh Chandra Prasad, Shauvik Ghosh in New Delhi & P.R. Sanjai in Mumbai contributed to this story.

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