In a move that could hurt foreign investment, the government has in the union budget today proposed changes to the Income Tax law that could shake foreign investor confidence. Analysts say the amendments could also give the government the right to tax Vodafone billions of dollars for its acquisition of Hutch.
In January, Vodafone won its case in the Supreme Court against the government, who had slapped a 2.2 billion dollar bill on the British telecom giant. The government has filed a review petition against that verdict in the Supreme Court – effectively, it has asked the court to re-consider its judgement.
Even as that case is being heard, the fine print to the budget presented by Finance Minister Pranab Mukherjee suggests changes to income tax laws retrospectively from 1962. The idea is to give India the right to tax cross-border deals if they involve Indian assets. Finance Secretary R S Gujral told NDTV Profit that Vodafone’s’ case will be decided in court, and that the changes proposed today will be used to assess current deals. According to Reuters, Mr Gujral said there was no plan to raise a fresh demand for taxes with Vodafone.
"We are examining this proposed decision with our lawyers, but we do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system," a Vodafone spokesperson told NDTV.
Tax professionals said that the potential law change is likely to come in for challenge. "They have amended the law because the Supreme Court found the law deficient on some grounds," said Neeru Ahuja, a partner at Deloitte Haskins & Sells, referring to the Vodafone case. "Now of course the issue is: can the government legitimately do this," she said.
The proposed amendment in tax rules may also be also significant for other multi-national companies including Kraft Foods, SABMiller and AT&T Inc, which also face potential tax demands in India over cross-border deals.
In 2007, Vodafone acquired 67% stake in Hutchison Essar, a mobile phone operator in India in 2007. The deal was between, Vodafone International Holdings BV - a Dutch subsidiary of the UK firm and CGP Investments, a Cayman Islands company which held the Indian telecom assets of Hutchison.
The deal was for Rs 55,000 crore or $11.5 billion. The tax department said the sale was taxable because the assets acquired by Vodafone were based in India. It said that Indian laws make the buyer responsible for paying capital gains tax to the government.
Vodafone had failed to deduct or withhold capital gains tax at the time of purchase. Capital gains tax is imposed on the profit earned after selling an asset. Vodafone was slapped with a bill of 2.2 billion dollars. Vodafone claimed that India could not levy taxes because the transaction was made between non-Indian companies outside the country.
The Supreme Court agreed, stating 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.
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.
(With inputs from Reuters)
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