Advertisement

HindustanTimes Mon,22 Sep 2014
Now, govt to tax overseas deals
HT Correspondent, Hindustan Times
New Delhi, March 17, 2012
First Published: 00:14 IST(17/3/2012)
Last Updated: 01:29 IST(17/3/2012)

The government  announced in the Budget on Friday that it will empower authorities to tax companies for acquiring assets in India even if the deal is concluded overseas, with retrospective effect from April 1, 1962.


The move is a direct fallout of the recent Supreme Court judgment, which ruled that British telecom giant Vodafone Plc was not liable to pay taxes for a transaction that it inked in 2007 to acquire majority stake in mobile phone operator Hutchison Essar. http://www.hindustantimes.com/Images/Popup/2012/3/17_03_12-metro5b.jpg

Under the proposed changes in IT Act, 1961, any asset which is registered or incorporated outside India shall be deemed to be situated in India “if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

“These amendments will take effect retrospectively from April 1, 1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years,” says the Memorandum to the Finance Bill, 2012.

Currently, the I-T Act does not have any provision that authorises the department to study deal structures and “look through” subsidiaries in multi-jurisdictional transactions.

The income tax (I-T) department had slapped Vodafone with a Rs. 11,218 crore tax bill after it acquired 67% stake in Hutchison Essar for $11.1 billion (about R55,000 crore) in 2007.

The I-T department had argued that although Vodafone made the payment to Hong Kong-based Hutchison’s subsidiary in Cayman Islands, it was essentially a transfer of an Indian asset and, therefore, Vodafone should have deducted tax at source when it made the payments to Hutchison.

Vodafone had contested the amount on the basis of the calculation questioning how the tax department, without speaking to Hutch, could quantify an amount. Besides, it also questioned the demand notice on the basis that no tax was due in any event.

The Supreme Court ruled that the deal was an offshore transaction, which fell outside India’s territorial tax jurisdiction, hence not taxable.

The government’s latest move is aimed at plugging the loophole as it stands to lose potential tax revenues of thousands of crores of rupees from prospective mergers and acquisitions involving Indian companies.

“Certain judicial pronouncements have created doubts about the scope and purpose of sections 9 and 195 of the IT Act. Further, there are certain issues in respect of income deemed to accrue or arise where there are conflicting decisions of various judicial authorities,” the memorandum said.

The measure will empower the income tax (I-T) department to impose taxes on transactions involving share transfers between two non-residents, if at least 50% of the underlying assets are in India.

Finance minister Pranab Mukherjee said the retrospective application of the provision does not violate the SC ruling.

The finance ministry said it is not looking to raise any fresh tax demand on Vodafone, finance secretary RS Gujral said.

Analysts said the provision is likely to have an impact on foreign investor sentiment in India. The changes in the Income Tax Act, will also have a bearing on about 500 overseas deals of similar kind, experts said.

Sanofi Aventis’ acquisition of Shanta Biotech and Vedanta’s takeover of Cairn India are similar transactions of foreign companies acquiring Indian assets. The Vodafone share price fell to 0.3% on the London Stock Exchange on Friday.


comment Note: By posting your comments here you agree to the terms and conditions of www.hindustantimes.com
blog comments powered by Disqus

Advertisement
Advertisement
hys

What do you expect from Budget 2012?

The Budget 2012-13 will be presented on March 16 by the Union finance minister Pranab Mukherjee. Share with us your views and expectations from the finance minister on this year's budget.
Advertisement
Copyright © 2014 HT Media Limited. All Rights Reserved