The Government may re-open instances similar to the Vodafone case, where an overseas transfer of assets has taken place with underlying real assets in India, in “exceptional cases” which have escaped taxation.

Any case which has “escaped the attention of tax authorities anywhere” may be re-opened, but with a time limit of the past six years, sources close to the development have said.

Clarifying the Government's reasoning behind bringing in the amendment, a senior official said the Supreme Court, in its judgment, had indicated that the Government should bring in “tax certainty” by clarifying its intention behind a particular law.

The judgment did not indicate whether such clarification should be retrospective or prospective, the official pointed out.

Pointing out that there was a “long history” of tax laws being amended with retrospective effect in order to overcome the decisions of a court, the official said even in the Vodafone case, the Bombay High Court had accepted that the intention of the law, under which the tax demand was raised, gave the Government the right to tax such cases. However, the Supreme Court had only said that the law as it stood at that point did not clarify this, hence the amendment.

The officials said that it had been the consistent approach of the tax authorities that the scope of the source rule (the Income-Tax Act 1961) was “wide enough” to tax transactions abroad, where the underlying economic nexus lay in India.

“Foreign investors are not seeking certainty of ‘no tax' in India. But they are looking for certainty of taxing provisions, which these clarificatory amendments provide,” the official argued.

FDI impact

Official sources also ruled out any negative impact on FDI sentiment, pointing out that tax havens with zero tax rate did not attract FDI, but were only used to channel investments to target markets. They also pointed out that China has taken a similar step to retrospectively clarify its tax law, and even imposes a 15 per cent tax on all investments routed through Mauritius.

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