The Vodafone case, the most followed tax controversy in recent times, took centre stage in the Budget with the Finance Minister, Mr Pranab Mukherjee, on Friday moving numerous amendments to the Income-Tax law to reverse the Supreme Court ruling on the matter.
If the amendments were to be enacted into law, Vodafone could face a tax bill of at least $2 billion for the near $11.2-billion deal with Hutchison in 2007. The taxman will also laugh all the way to the bank on a spate of deals involving indirect transfer of shares abroad, but deriving values substantially from assets located in India.
The Supreme Court had, in the Vodafone case, ruled that gains derived from transfer of shares of a foreign company cannot be taxed in India, even if the value of shares is substantially derived from assets located in India. Now, the Government has come up with a spate of amendments, that too on a retrospective basis from April 1962, to bring Vodafone-Hutchison type transactions into tax net. The amendments are being proposed as part of the Finance Bill 2012.
Meanwhile, telecom major Vodafone said in a statement: “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.”
Creating Uncertainty
Tax experts felt that the proposed amendments would create uncertainty among global investors. The amendments have been proposed on multiple sections including the one on deeming income provision (Section 9), definition of property, definition of capital asset and also on withholding tax obligation on payments made to non-residents, tax experts said.
Mr Sandeep Ladda, Executive Director- Tax & Regulatory Services, PwC India, said the “uncertainty” as regards attracting foreign direct investments, will be paramount given the flip-flop in the policies of the government, especially given the fact that the amendment is retrospective. This sends a clear message across the larger global investing community that even a landmark Supreme Court judgment is subject to retraction by the changes that the Government can bring about by amending the law retrospectively, he said.
Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas, said that this is a concerted effort on part of the Government to unwind the positive impact of the Supreme Court verdict. These proposed amendments bring out a clear intent of legislature to tax indirect transfer of shares where such transfers derive values substantially from assets in India, he said.
Mr Prashant Khatore, Tax Partner, Ernst & Young, said that the retrospective amendment would make Vodafone type of past deals taxable. “It would be another open question of law whether tax would be recoverable from payer or payee. However, the change of law retrospectively in respect of such transactions and also on some other type of transactions like software taxation may not be appreciated by the international community as it may not be reflective of certainty of a tax position. Perhaps the change could have been prospective to enable the players to factor in the tax costs appropriately”.