If British telecom giant Vodafone Plc. and the Indian government indeed reach a settlement on the much disputed tax issue, the government will waive off tax penalties and bring down Vodafone’s tax burden to Rs.79bn from the current Rs.200bn, reports said citing a finance ministry source.

However, reports stated that the discussions were in the preliminary stage and no outcome was reached as opinion was divided within the finance ministry.

Also, the government would wait for a formal letter from Vodafone before considering such a waiver.

Reports also indicated that the negotiation package could include Vodafone withdrawing a litigation before the Bombay High Court where it challenged a move by the IT department declaring it as a "representative assessee' or an agent of Hong Kong-based Hutchison Whampoa from which it bought its Indian mobile business in 2007.

What is noteworthy is that this occurrence coincides with moves by Hutchison seeking to once again invest in India's infrastructure sector.

Reports said quoting Vodafone spokesman Ben Padovan, "The Supreme Court put the penalty notice on hold until there had been a judgement in the tax case. Now that the Supreme Court has given a clear and unambiguous ruling saying that there was no tax to pay, Vodafone is seeking to get this penalty notice quashed by the Courts."

If this proposal does come through and the Budget proposal is cleared by Parliament, the IT department may issue a formal order, known as a circular, to exempt companies from paying penalty for failure to deduct capital gains tax on cross-border deals that took place before April 1, 2012.

In Vodafone's case, the compromise involves asking the company to pay tax to the tune of Rs.79bn but sparing it from penalty of an equal amount for failure to deduct tax at source.

The move may be seen by many as an attempt by the government, which has been under fire lately for its policy proposals which have discouraged foreign investors from India, to pacify them.

Overseas investors were irked by the government’s Budget proposal to retrospectively tax mergers and acquisitions of companies where there is an underlying asset located in India and its move to introduce a general anti-avoidance rule to curb sharp tax avoidance practices.