Govt looks to budget for tax powers

Govt looks to budget for tax powers

New Delhi: The government plans to incorporate some of the provisions of the direct taxes code (DTC) in the forthcoming budget itself, giving the income-tax (I-T) department power to tax share transfers between international companies, such as the one between Vodafone and Hutchison.

The I-T department last week lost a case in the Supreme Court over the deal that allowed Vodafone to enter India. The deal, on which the tax demand had been levied, had taken place overseas.

With the roll-out of DTC delayed until at least 2013-14, the government wants to use the 2012-13 budget to plug what it sees as loopholes. But the amendments are likely to give the government power to tax similar transactions only prospectively and not retrospectively.

On Friday, the apex court ruled the $11.08 billion Vodafone-Hutchison transaction was not taxable under Indian law. It rejected the tax department’s claim of jurisdiction over a share transfer carried out overseas.

“The DTC has provisions that would have brought transactions like Vodafone under the tax net. We are examining if these changes can be incorporated in this year’s budget itself," said a senior finance ministry official, who didn’t want to be named.

The code also has a provision stipulating that all share transfers between two non-residents will be taxable in India, if at least 50% of the underlying assets are in India.

The apex court had criticized the government over its failure to bring in legislative changes to tax such transactions. Using DTC as the basis, the court had reasoned that since the government had clarified in the proposed law that such transactions would be taxable in the future, it could not tax such transactions under the current laws.

“The revenue department was told way back in 2004 that they should frame rules if they have issues with such transactions being able to escape the tax net," said Sudhir Kapadia, national tax leader at audit and consulting firm Ernst and Young. “The government will have to bring in both GAAR and the clause to tax indirect transfer of shares if they want to tax such transactions."

“Changes in law with retrospective effect could be a complete disaster. The Supreme Court’s judgement has a far-reaching impact on foreign direct investment (FDI). Even if Parliament has the ability to amend laws retrospectively, it should not be done as it will impact the credibility of the government," he added.

The DTC Bill is currently with the parliamentary standing committee of finance. “It is possible that the government brings in some of the provisions in DTC in this year’s budget. But whether these provisions can be incorporated when DTC is still being looked into by the standing committee is an issue of propriety," said Rahul Garg, executive director at PricewaterhouseCoopers.

The government is also unlikely to file a review petition in the apex court against the Vodafone ruling. “A final decision (on the review petition) will be taken only next week," said another finance ministry official.

The apex court had also recognized Mauritius to be a legitimate route of FDI, rejecting the claim of the tax department that the route was being used to avoid paying taxes. The ruling will force the government to hasten the negotiations with Mauritius on amending double-tax avoidance agreements (DTAAs).

“We have started negotiations with the Mauritius government and one round of discussions has been completed. But they are reluctant to make changes to the existing treaty," said R.S. Gujral, finance secretary.

The DTAA between India and Mauritius provides that capital gains arising in India by sale of securities can only be taxed in Mauritius. However, since Mauritius does not tax capital gains, this route was being misused.

The court’s ruling will impact many mergers and acquisitions currently being contested by the tax department in courts. These include the purchase of a stake in Idea Cellular Ltd from AT&T by Aditya Birla Nuvo and Tata Industries, SABMiller Plc.’s global acquisition of Foster’s Group, and Vodafone’s purchase Essar’s 33% stake in Vodafone Essar, in which Vodafone had withheld tax of $880 million.

When asked if Essar had approached the finance ministry for a refund, Gujral said: “Can they approach us? They can’t. They have voluntarily deducted tax. When it’s done voluntarily, there’s a process to claim this tax."

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