With cross border mergers and acquisitions (M&As) becoming the flavour of the season for India Inc, the finance ministry has decided to bring in measures in Budget 2008-09, which would ensure its share of taxes from such deals.
Finance minister P Chidambaram has proposed to bring interest payments, royalty and payments for technical services to a non-resident or foreign company under the TDS net. At present persons making such payments have to furnish an undertaking from the assessing officer and an accountant based on which tax is collected a at later stage. However with the number of such remittances increasing, the finance ministry has felt that it is difficult to keep track of all such transactions and collect taxes.
More importantly, the Finance Bill 2008 also proposes to ensure that capital gains tax should be levied on acquisitions in India. It has said that the buyer will be responsible for paying the tax after purchasing any capital asset?a share or debenture of a company in India.
The buyer will have to deduct TDS and failure to do so would leave him liable to pay the tax. The tax will have to be paid with a retrospective effect from June 2002 brining many such deals under the tax net.
The move comes in the wake of the Indian income tax authorities arising to the possibility of earning millions through such deals. The department is already arguing a case in the Bombay High Court regarding the tax liability in the Hutch Vodafone deal.
Following the deal last year, the department sent a notice to Vodafone, asking for about $1.7 billion as capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone.
It argues that the company should have deducted tax at source while making payment to Hong Kong-based Hutchison Telecom International Ltd.
The company has however contested the notice on the grounds that the transaction was between two offshore countries.
Following the Hutch Vodafone case, tax authorities have sent similar notices for about 400 such deals to various companies.