Budget Bombshell: Vodafone verdict prompts changes to tax laws
Markets will look to consolidate in the week ahead after most event risks like monetary policy and budget now over.
In a move that will have far-reaching impact on foreign investment and the Vodafone tax case, the government has proposed an amendment to the Income tax act from April 1, 1962 that would allow it to tax transactions like Vodafone's acquisition of Hutch.
The government has quietly inserted an amendment to provisions of the Income Tax Act to tax overseas transfer of shares that hold underlying assets in India like in the Vodafone situation. The government plans enforce the amendment with retrospective effect from 1962.
According to R S Gujral, finance secretary, transactions like Vodafone are subject to taxes in India.
“The new amendment is only a clarification reiterating the point that such transactions are to be taxed in India,” he said.
He also said that the 10 per cent withholding tax should have been levied on Vodafone.
He said that the government expects to recover Rs 35,000 to Rs 40,000 crore from cases similar to Vodafone and that the figure included Vodafone.
This means the government has changed laws with retrospective effect (1962).
Experts have expressed an outrage over the decision.
“The government has challenged the Supreme Court,” Surjit Bhalla, chairman Ox(u)s Investment.
“The decision will affect investor sentiment,” Ketan Dalal of PriceWaterhouseCoopers, a consultancy firm said.
The BSE Sensex shed 1.3 per cent at 3.30 pm on Friday.
On 20 January 2012, the Supreme Court ruled that Vodafone, the British telecom giant does not have to pay taxes and penalties for the transaction that saw the company acquire 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007. The deal was for 55,000 crore or $11.5 billion.
The Supreme Court had said that Indian tax officials do not have jurisdiction over a deal between two global companies, even if the assets involved in that deal are located in India.
The Supreme Court had said that the Vodafone tax case was an "eye-opener" for Indian legislature to take measures to meet such unprecedented situations which arise due to "what we lack in our regulatory laws".
"Case in hand is an eye-opener of what we lack in our regulatory laws and what measures we have to take to meet the various unprecedented situations, that too without sacrificing national interest," Justice K S Radhakrishnan, who wrote a separate judgment concurring with the findings of Chief Justice S H Kapadia and Justice Swatanter Kumar had said.
The court said insufficient legislation might give opportunities for money laundering and tax evasion adding "it is imperative that Indian Parliament would address all these issues with utmost urgency".
