I-T goes into flashback mode
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The proposed amendment (Amendment 911) to the Income-Tax Act with retrospective effect from April 1, 1962, that would allow the authorities to tax transactions like Vodafone’s acquisition of Hutch, among others, has thrown up several vexed issues. The move as announced by the union finance minister Pranab Mukherjee in his Budget, is also expected to have far reaching impact on foreign institutional investments into the country as well.
“One of the most significant amendments regarding taxability of cross-border M&A transaction involving indirect transfer of share or interest in an Indian company is sought to be laid to rest. Surprisingly, a retrospective amendment effective 1962 to a controversial issue that attracted global attention finds no mention either in finance minister’s speech or in the Memorandum to the Bill. The conviction of the government is evident and its intent to arrest application of Supreme Court decision in Vodafone’s case in similarly concluded transactions is clear. The tendency of the government to make retrospective amendments on substantial legal and interpretational issues is reflective of an aggressive tax policy and a signal to investors to desist from aggressive tax planning,” Mr Vipul Jhaveri, partner, Deloitte Haskins and Sells, said.
An official communique from Vodafone said, “We are examining this proposed decision with our lawyers, but we do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system.”
It may be mentioned that the FM has almost quietly inserted an amendment to provisions of the Income-Tax Act to tax overseas transfer of shares that hold underlying assets in India like in the Vodafone situation. The government plans to enforce the amendment with retrospective effect from 1962. Mr R S Gujral, finance secretary, said that transactions like Vodafone are subject to taxes in India.
“The new amendment is only a clarification reiterating the point that such transactions are to be taxed in India,” he clarified. He said that the 10 per cent withholding tax should have been levied on Vodafone. The Centre expects to recover Rs35,000-Rs40,000 crore from cases similar to Vodafone and that the figure included Voda-fone, Mr Gujral said.
Ruling that favoured Vodafone
The Supreme Court, on January 20, had ruled that Vodafone, the British telecom company does not have to pay taxes and penalties for the transaction that saw the company acquire 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007.
The deal was for 55,000 crore. The apex court ruling was on grounds that Indian tax officials do not have jurisdiction over a deal between two global companies, even if the assets involved in that deal are located in India.
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