With the Supreme Court declining to intervene in the tax demand case against it Friday, mobile service company Vodafone faces a potential tax demand of up to $2 billion (Rs 9,800 crore) from the tax authorities.

Even if the company appeals against the tax demand with Commissioner Income Tax (Appeal) - the first appellate authority - Vodafone may have to pay half ($ 1 billion or Rs 4,900 crore) of the tax demand before the end of March.

The case relates to a demand that the Indian tax authorities raised on Vodafone after it bought a controlling stake (67 per cent) in Hutchison Essar Ltd, India's third largest mobile service provider, from Hong Kong-based Hutchison Telecommunications International in 2007.

Vodafone acquired a company registered in Cayman Islands, a known tax-haven, for $11.2 billion. It contended that the transaction involved two overseas entities so the company was not liable to pay tax in India.

The tax department rejected the contention and sent out a show cause notice on March 23, 2007 saying the overseas transaction related to assets acquired in India and that Vodafone should have deducted capital gains tax at source before paying HTIL. Long term capital gains tax is levied at the rate of 20 per cent.  The showcause notice asked the company to explain why it should not be held as an assessee in default.

Thereafter, Vodafone moved the Bombay high court on September 7, 2007, which dismissed the petition on December 3 last year, after which the company appealed to the Supreme Court.

Since the Supreme Court declined to intervene and told Vodafone to present its case before the tax authorities first, the income tax department is now free to take any action if the company does not submit a reply to its show-cause (see box).

VODAFONE'S NEXT CALL
* Vodafone may have to immediately file a response and submit details with the IT department. Companies are normally allowed two weeks  * A tax demand is most likely to be raised on the order (before February 28 if taxes are to be collected in this financial year)	* Thereafter, the company has 30 days to pay the tax. Then tax department can take action if not paid.  * Even if it appeals, the company may have to pay up to 50 per cent of the demand at the first appeal level (Commissioner of Income Tax (Appeal)

"The scope for defending itself further is limited. A tax notice may be slapped within two weeks," said an income tax official.