Essar wont benefit from Shome effect

Written by Arun S | Sunny Verma | New Delhi | Updated: Oct 11 2012, 05:41am hrs
The income tax department is unlikely to refund $880 million paid by the Essar Group when it sold its stake to Vodafone last year, despite the Parthasarathi Shome committee recommendations against retrospective taxation of overseas transactions involving indirect transfer of underlying Indian assets. If you include other cases like Idea-AT&T and Vedanta-Sesa Goa (see box), according to a Rajya Sabha reply by SS Palanimanickam, minister of state for finance in April, the total potential tax due, from Vodafone-type overseas deals, runs into R35,000-40,000 crore.

Though it is early days yet the Shome report is in the discussion stage and the final report will be in by October 31 income tax sources say the government may go in for the second solution offered by the Shome panel. While saying there was a possibility of the government proceeding with retrospective application, the panel has said: No person should be treated as an assessee in default or as a representative assessee of a non-resident this would imply that the government could apply the provisions only to the taxpayer who earned capital gains from the indirect transfer.

In such cases of retrospective taxation, the Shome panel has said, there should be no interest/penalty on the tax being charged on a retrospective basis. It is not clear how much this will reduce the R35,000-40,000 crore amount Palanimanickam spoke of.

Of all the cases under discussion, like Essar, the tax being charged is from the seller and not the buyer it was only in the case of Vodafone-Hutch that this assessee in default concept was used for Vodafone. No tax demand was raised by the department on Hutch.

The Essar Group, which believed it did not have any tax liability on the transaction, asked for a refund after the Supreme Court ruled in favour of Vodafone in the Vodafone-Hutch deal. A tax official told FE that even if the government didnt take a view on the Shome committee, the Essar-Vodafone case was quite different from the Vodafone-Hutch case. Pointing to the structure of the Essar deal, the official said though the Essar entities in this case were Mauritius-based, control and management were in Indian hands. According to the officials, this cannot be seen purely as a foreign firm and it needs to be investigated whether there was any round-tripping of funds.