Spare Vodafone, go after Hutch if need be: Shome

Written by fe Bureau | New Delhi | Updated: Oct 10 2012, 10:38am hrs
Parthasarathi ShomeParthasarathi Shome
The Parthasarathi Shome committee has voted against retrospective applicability of the recently amended law on indirect transfer of assets. However, assuming that the government might still opt for retrospectivity given the high stakes in the Vodafone case, the panel suggested a slew of clarifications that would substantially reduce the irritant nature of the law, regardless of whether past cases remain within its domain.

Significantly, the panel said the government should apply the provision only to the taxpayer who earned capital gains (the seller) from indirect transfers abroad involving Indian assets. This, and the recommendation that in no such case should the taxpayer be asked to pay interest and penalty on the tax computed, would come as huge relief to the British telecom major.

Finance minister P Chidambaram on Monday said he might not wait for the Budget session of Parliament to resolve investor concerns on retrospective tax changes, and would do it as early as possible.

Participants in other cross-border corporate deals like AT&T-Idea Cellular, GE-Genpact, Vedanta-Mitsui-Sesa Goa, SABMiller-Fosters and Sanofi Aventis-Shantha Biotech will also benefit if the government accepts Shomes prescriptions. It would mean that capital gains tax with respect to Vodafones $11-billion acquisition of Hutchs stake in Hutch-Essar in 2007, if applicable, can only be levied on Hutch and not on Vodafone. Also, the liability on the British telecom major would be just $2.2 billion, which is the tax computed. Inclusive of interest and penalty, the claim would have been upwards of $4 billion.

The panels report was made public by the finance ministry on Tuesday. Both its crucial recommendations only prospective application and that the seller alone will be asked to pay the tax were first reported by FE in two separate news stories. (http://goo.gl/v9SC0; http://goo.gl/bD3vT)

The panel which critically reviewed the relevant amendments introduced vide the Finance Act 2012 in the Income-Tax Act, said that contrary to the governments claim, these were not clarificatory in nature, but would tend to widen the tax base. The panel opined that retrospective application of tax law should occur only in exceptional or rarest of rare cases and with particular objectives (like correcting mistakes, removing technical defects and protecting tax base from highly abusive tax planning schemes).

Capital assets of a foreign company in India can be deemed to be situated in India if the value from them is more than 50% of the global assets of the company concerned. It also proposed a look-through approach which means that while estimating the value of the share of a foreign company, all intermediaries between the company and assets in India could be ignored.

To shield small shareholders from any undue hardship that could arise from the law, the panel recommended a set of safeguards. It said that in case the foreign company is the immediate holding company of the assets situated in India, transfer of its shares outside India wont be subject to tax in the country if the voting right or share capital of the transferor along with its associated enterprises in the company is less than 26% of the total voting right/share capital of the company during the preceding 12 months.

In what would reduce the scope of the new law, the panel also said any transfer of shares or interest in a foreign company which doesnt result in participation in ownership, capital, control or management should be outside the ambit of the recent amendment.

In order to address the concerns expressed by private equity investors over the possibility that their gains outside India from redemption or inter se transfer amongst them being taxed in India, the Shome panel proposed a set of clarifications. If accepted, these clarifications will ensure that private equity funds wonts face any additional tax liability in India from the indirect transfer taxation.

Stating that the relevant Section 9 (1)( i) of the I-T Act which became effective retrospectively (as of April 1 1962) with the recent amendments is a general source rule for a non-resident, the panel sought to redefine the additional meaning given to various words in the new insertion to allay the taxpayer concerns.

The committee also proposed changes in the amended law to avoid unintended consequences such as taxation of dividends paid by a foreign company.