Retrospective amendment for the Vodafone case

Plan panel Deputy Chairman Montek Singh Ahluwalia today said that generally changes to the laws should not be implemented retrospectively even as he termed the proposed amendment to the I-T Act to tax Vodafone-like deals as "appropriate". "I think, objectively, the change is not only appropriate one....It is something we have singled in the Direct Taxes Code (DTC). Going by general rules. But I agree with you that one should avoid retrospective amendments," Ahluwalia told Karan Thapar in 'Devil's Advocate' programme on a TV channel.

As per amendments proposed in the I-T Act by Finance Minister Pranab Mukherjee in his Budget proposals, all persons, whether residents or non-residents, having business connection in India, will have to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil. The amendments, once carried out, will have implications on Vodafone which won the Rs 11,000-crore tax dispute case against tax authorities in the Supreme Court. It will also impact other similar cases involving taxes to the tune of about Rs 30,000 crore. About the impact of the proposed amendment on Vodafone case, Ahluwalia said, "I do not want to comment on the impact on any particular company. I think... It is not only appropriate one, but something we have singled in the proposed DTC. We are going to do that anyway." On the impact of this move on foreign investment flows, he said, "Whenever you have retrospective amendment which affects an individual, he will certainly feel that he has been treated unfairly." However, he allayed fears that this will impact the flow of foreign funds into the country. "I think that foreign investors should have absolutely no doubt in their mind that the government does not intend to change some of the basic conditions retrospectively. The Supreme Court set aside a Bombay High Court verdict directing Vodafone International Holdings to pay Rs.11, 000 Crores to the Income Tax Department by way of capital gains tax -after the telecom major acquired a majority stake in Hutch Essar in the country as it held that a transaction of transfer of shares of a foreign company between two nonresidents is not taxable in India.

It is feared that the government shall make necessary and clear amendment in Income Tax Act whereby such transactions for companies operating in India shall be liable to income tax. If such an amendment is made it shall not be in the interest of country as a whole for its economic development as than it shall have a check on economic activities of foreign companies in India which is generating much employment opportunities in India with highest pay packets too. Further, its financial resources available for ploughing back profits in Indian operations shall be badly affected too. But if government wish to tax it in future by an amendment in Income Tax Act it is better that an exemption may be given with certain conditions like such saved funds untaxed may be put to use in future within a specified time only say within three to five years -in India and a separate audit may be compulsory for such a use of funds in India only.

Sometime government makes retrospective amendments to overrule Court decisions which is a bad law and is never justified from any angle /logic. Any amendment must be prospective only. Even such serious type of amendments if any if is to be made than sufficient time gap few years must be given to taxpayers to plan their future financial transactions well in advance. Overnight or short span of time can never be justified. Though it is well said that there is no logic in tax laws!

Finance Minister Pranab Mukherjee maintained on Sunday that the budgetary proposal to amend the Income Tax Act with retrospective effect from 1962 to assert the government's right to levy tax on merger and acquisition (M&A) deals involving overseas companies with business assets in India is not Vodafone case specific, but an enabling provision to protect the fiscal interests of the country and avert the chances of a crisis. Faced with all-round criticism at home and abroad of the move to amend the relevant legal provision with the objective of bringing the Vodafone case under the ambit of tax through the back door after it lost the litigation in the Supreme Court, the government has gone on a fire-fighting mode to explain its stand and legal position. In his post-budget interaction with the print media here, while conceding that retrospective amendments should not normally be brought in, Mr. Mukherjee asserted that the changes being sought are not Vodafone-specific. In fact, it was not merely to prevent the erosion of revenues in present cases, but also to prevent the outgo of revenues in old cases. Retrospective fiscal legislation normally should not be brought in. But if a judgment comes that Rs. 5 lakh crore in revenue has to be returned, would it be possible? Everybody knows that it will lead to a financial crisis, he said. We are making three points quite clear that India is a not a no tax' or low tax' or even a tax haven.' India is a country where all taxpayers, whether resident or non-resident, will be treated on a par. Secondly, India is a country where tax laws are that if you pay tax in one country, you need not pay tax in the other country of your business operation which is covered by the DTAA. But it cannot be a case that you pay no tax at all. Explaining the circumstances under which the amendment had become necessary, he said some companies or entities may do their tax planning in such a way that they don't have to pay tax at all. Had the case been that they had to pay tax in one country and pay tax in another country as well, it would have been a case of double taxation and we would have dealt with it accordingly. Why we have to go back to day one is that this is one piece of legislation which is relevant to the date of enactment. Because I am amending the Income Tax Act 1961, Section 90, its relevant date is the date of enactment of the Act and that is why it goes back to 1962. Mr. Mukherjee said the intention was clear: where assets are created in one country, it will have to be taxed by that country unless it is covered by the DTAA. Does that mean that all cases of a similar nature from 1962 come into the ambit of tax? No. Because, other provisions of the I-T Act are there which says that you cannot reopen any case beyond six years, he said. Mr. Mukherjee also pointed out that some confusion had been created owing to another amendment which pertained to reopening assessment up to 16 years. But that, he said, was only for resident taxpayers who had unaccounted or unauthorised income or assets abroad. To a pointed question whether the amendment had been proposed to get back the Rs.11,000 crore as tax from Vodafone, Mr. Mukherjee said: Unless the review petition is disposed of, this matter is sub-judice. I am not talking of the case of Vodafone or X or Y or Z. Every Finance Minister will have to protect the

interest of the country from the revenue point of view. It is not for reopening the cases, but protecting the government's interests from the revenue angle. Alongside, in a note circulated by the Finance Ministry, the government sought to argue that the decision to amend the I-T Act with retrospective effect would not impact foreign investment flows. The apprehension that the retrospective amendments would create negative sentiment for FDI is not correct. FDI comes when there is profitability. FDI does not come only on account of zero tax To make the intent of the legislature clear, clarificatory amendments have been proposed. This will bring tax certainty and would also make it clear that India has a right to tax similar transactions. It did not mean that the government would start re-examining tax cases from 1962 onwards. In effect, since the Vodafone transaction was not taxed in either of the countries, it was susceptible to 10 per cent tax in India. Source: The hindu.

Vodafone case
Vodafone International Holdings BV, based in Netherlands and controlled by Vodafone UK, obtained the controlling interest and share of CGP Investments Holdings Ltd (CGP) located in Cayman Island for a value of $11.01 billion from Hutchinson Telecommunications International Ltd (HTIL), which had stake in Hutchinson Essar Ltd (HEL) that handled the company's mobile operations in India. HEL had its stake in CGP Holdings, from which Vodafone bought 52 per cent of HEL's stake in 2007, thereby vesting controlling interest over them. The Bombay High Court, on September 8, ruled that where the underlying assets of the transaction between two or more offshore entities lies in India, it is subject to capital gains tax under relevant income tax laws in India. The Court invoked the nexus rule wherein a state can tax by connecting a person sought to be taxed with the jurisdiction, which seeks to tax. The treatment of the company as an Assessee in Default (AID) under Section 201(1)1of the Income Tax Act and reading Sections 5(2)2, 9(1)3 and 1954, the court came to the conclusion that Vodafone was liable to deduct tax at source (TDS). Vodafone has now appealed before the Supreme Court to revisit the judgment, which makes them liable for a record amount of Rs 12,000 crores going to the tax authorities' kitty.