Many of us would remember the British sitcom, Mind Your Language , which featured people of various nationalities trying to learn English.

In a move reminiscent of this sitcom, the Government has proposed the Finance Bill, 2012, with certain retrospective amendments to the Income-Tax Act, 1961 so as to nullify the Supreme Court's Vodafone judgement. In a bid to tax Vodafone-like transactions, the Bill has redefined certain commonly understood terms. Explanation 4, introduced under Section 9(1) of the Act, defines ‘through' to mean and include ‘by means of,' ‘in consequence of' or ‘by reason of.'

The intention of this amendment is clear: to tax all income accruing or arising, directly or indirectly from various modes, say, ‘through' a business connection or ‘through' a property. These attempts to redefine simple terms would have been amusing, if their consequences were not so severe.

definition of property

Further, the Government, through an explanation to Section 2(14) of the Act, has clarified that the definition of ‘property' is now proposed to include and is deemed to have always included ‘any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.'

Similarly, the definition of ‘transfer' (Section 2(47) of the Act) is also proposed to be widened to specifically target the indirect transfer of any Indian asset or creation of interest in, disposing of or parting with any asset, whether voluntarily or otherwise, and whether entered into by an agreement in India or outside India.

radical departure

Moreover, explanation 5 under Section 9(1) of the Act fixes the location of shares or interest in a company incorporated outside India. If such shares or interest derive, directly or indirectly, their value ‘substantially from assets located in India,' they would be deemed to be located in India.

This is a radical departure from the general approach, where the situs of shares would depend on the country in which the company is incorporated.

Through the Bill, the Government has bent over backwards trying to tax offshore transfers. However, it has failed to take into account some of the absurdities that could result from a simple reading of the new provisions.

Three examples

A is a US-based company with a wholly owned Indian subsidiary, B. A has significant assets in India. Pursuant to an investment by a strategic investor, the management control of A changes, though A continues to hold 100 per cent of B shares. This transaction may now be subject to tax in India, in light of the proposed amendments that tax the transfer of ‘interest' in a company with substantial assets in India.

X, a foreign company, holds 40 per cent shares in Y, an Indian company, and can also appoint one-third of the directors on Y's board. Under a loan agreement, X could further appoint additional directors on Y's board so as to obtain control of the board.

This may now amount to ‘transfer' of ‘property,' triggering capital gains with attendant TDS consequences and other compliances.

A is a company listed in the US with substantial assets in India. When its shares are traded on the US stock exchanges, every such share transfer will attract tax on capital gains in India.

Conclusion

The above examples clearly show how even routine transactions will get covered within the Indian tax net in the future, if the proposed amendments are enacted as such.

At present, uncertainties for foreign investors abound, which are certain to affect foreign direct investment.

With the General Anti-Avoidance Rules also proposed in the Bill, it remains to be seen in what form the amendments will be incorporated into the I-T Act and how significantly these impact the Indian fiscal system.

Ganesh Raju is Executive Director, Mergers and Acquisitions Tax, PwC India. (With inputs from Ramanujam, Senior Advisor)

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