The Direct Taxes Code Bill has tried to put an end to any Vodafone-like tax litigation in future as the new law clearly spells out that a company selling stake that has underlying assets in India will have to shell out capital gains tax on the profit made by sale of such stake.
The dispute over payment of capital gains tax comes up in case of stake sale in a firm in India, when the seller and the buyer of the shares are abroad.
The DTC Bill tabled in Parliament, ending any confusion over jurisdiction of tax department over levying capital gains tax. Section V of the DTC Bill has categorised the income from the activities treated as capital gains and thus tax leviable on the gain. “Income from transfer, outside India, of any share or interest in a foreign company unless at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company represent at least 50% of the fair market value of all assets owned by the company,” the Bill says in Section V subsection 4g.
In fact, the formula to compute the capital gains is also given in the subsection 6 of Section V. As per the provisions of the Bill, if transaction takes place where a company owns underlying assets which are in excess of 50% Indian assets then, on a proportional basis, capital gain would be chargeable.
In case of Vodafone-Hutch, the department is still fighting a legal battle over levying capital gains tax on the profits from sale of shares in the company in India.
The clarity would put to rest the Vodafone-like incidents with anyone before entering into a deal for stake sale, knowing the tax liability in advance. Telecom major Vodafone has been disputing the claims of the Income Tax Department, saying that no tax is payable on its $ 11.1 billion deal with Hutchison in February, 2007. The dispute concerns Vodafone Group’s acquisition of a 67% stake in Hutchison Essar from Hong Kong’s Hutchison Telecommunications International.
The primary question that Vodafone requested the apex court to answer was whether Indian authorities have the jurisdiction to tax a transaction that occurred outside India between two global players.
There have been various such deals in the past like the Tata-AT&T and Vedanta-Sesa Goa where the underlying asset has been in India. The latest is going to be Vedanta and Cairn where the assets of Cairn in India are far more than 50%.