Will there be an out of court settlement for Vodafone?

The clash between the Indian government and Vodafone seems to be getting more intense by the day. Now, the US is also weighing in: The Wall Street Journal reported that Treasury Secretary Timothy Geithner raised concerns related to proposed tax measures to finance minister Pranab Mukherjee, and sought reassurance that India welcomes foreign investment.

The Indian government has come under fire for a proposal to introduce retrospective taxation on overseas transactions that involve Indian assets dating as far back as 1962.

The proposal has not been enacted into law yet, but Vodafone recently filed a legal notice against the central government, which is the first step in initiating international arbitration proceedings under theIndia-Netherlands bilateral investment treaty.

However, in an interview with The Economic Times, finance secretary RS Gujaral pointed out that theIndia-Netherlands treaty categorically mentions that the treaty will not be applicable in cases in which the predominant issue concerns tax or legislation.

He said Vodafone had possibly jumped the gun possibly because it is the legal victor as of now. In January, the Supreme Court ruled that Vodafone was not liable to pay tax on its 2007 acquisition of the Indian assets of Hutchison Whampoa through an overseas deal.

But as _Firstpost_noted earlier , “How can the Indo-Netherlands Treaty, which provides for arbitration in case the two parties cannot come to an agreement on the dispute, come into the picture till the court process is finally over?”

Another_Economic Times_ report speculates there might be an attempt to settle the matter out of court to prevent tarnishing India’s image as a prime destination for foreign investors, although it argues that given the government’s shaky politicalstatus now and the different allegations of corruption, an out-of-court settlement would not be the ideal way out for the government.

Certainly, the Prime Minister is getting worried about the situation.

According to a DNA report , the PM has asked the finance ministry to explain the Vodafone issue to ensure a smooth Budget session of Parliament.“Singh doesn’t want foreign investors to shy away from India and is doubtful if retrospective legislation to enforce a long-pending tax sends out the right signal in a competitive global environment,” the report said.

In any case, expect more dust to be kicked up over the matter in coming days.