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A law taking a taxing turn

In the budget, the finance minister has introduced a retrospective provision that would empower the government to scrutinise corporate transactions from 1962. Industry fears this will hurt foreign investment into India. A lot will depend on how the law is applied and whether the Centre will arbitrarily use it. HT explains the factors that led to the proposed changes.

business Updated: Mar 21, 2012 02:20 IST
Gaurav Choudhury

In the budget, the finance minister has introduced a retrospective provision that would empower the government to scrutinise corporate transactions from 1962. Industry fears this will hurt foreign investment into India. A lot will depend on how the law is applied and whether the Centre will arbitrarily use it. HT explains the factors that led to the proposed changes.

What is retrospective lawmaking?

It is a law that is passed today but which is applicable from days, months or years ago.http://www.hindustantimes.com/Images/Popup/2012/3/21_03_12-biz4.jpg

Why is it relevant?
Finance Bill 2012, once voted into law by Parliament, will empower authorities to tax companies for acquiring assets in India even if the deal is concluded overseas retrospectively from April 1, 1962.

What are the proposed changes?
As per the proposed changes in Income Tax Act, 1961, any asset which is registered or incorporated outside India shall be deemed to be situated in India if the assets “substantially” located in India.” These amendments will take effect retrospectively from April 1, 1962.

Is this new to India?
No. There are several cases of laws being applicable retrospectively.

Is this a global practice?
Yes. China, the US, the UK and Germany and many other countries in Europe make such laws.

Why is it significant?
It is significant because of the rules it could set for taxation of transactions, which involve transfer of Indian assets, but are concluded overseas. This will potentially allow about 500 transactions for scrutiny by the tax department.

Why is it being introduced today?
The move is a direct fallout of the recent Supreme Court judgment which ruled that British telecom giant Vodafone wasn’t liable to pay $2 billion (R11,200 crore or about the size of India’s mid-day meal scheme) in taxes for a transaction that it inked in 2007 to acquire a majority stake in mobile phone operator Hutchison Essar. A Cayman Islands-registered arm of Hutchison received the payment from Vodafone.

What is rationale for introducing the new provision?

The government has said the amendment will bring tax certainty and would also make it clear that India has the right to tax similar transactions.http://www.hindustantimes.com/Images/Popup/2012/3/21_03_12-biz5.jpg

What was the dispute in the Vodafone case?
India’s income-tax (I-T) department, in September 2007, issued notices to Vodafone saying it is liable to pay taxes on the transaction. The I-T department’s argument was that the Cayman Islands transaction was essentially a transfer of an Indian asset and therefore, Vodafone should have deducted tax at source when it paid Hutchison for the deal.

What was the tax amount involved?
The I-T department quantified Vodafone’s tax liability at R11,200 crore. It had asked the company to deposit R2,500 crore with the Supreme Court and provide a guarantee of R8,500 crore pending final adjudication of the case.

What was Vodafone’s response to this?
Vodafone contested it on the basis that no tax was due in any event as the deal was concluded in Cayman Islands.

What did the Supreme Court rule?
In January, the Supreme Court held that tax authorities do not have jurisdiction on an overseas transaction, thus setting aside the Bombay high court judgment asking the company to pay income tax of Rs 11,200 crore.

Will the government scrutinise all corporate deals in the past 50 years?
The government has maintained that there is no question of reopening old cases. In exceptional cases, where any case has escaped attention of the tax administration, they can be reopened only for the past six years.

What has been Vodafone’s response to the change in retrospective law?
It has said it does not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court.