In a measure that will have far-reaching impact on foreign investment and the Vodafone case having a tax implication of Rs 11,000 crore,the government today proposed amendment in the Income Tax Act (I-T Act) retrospectively from April 1,1962.
Under the proposed amendment,all persons,whether resident or non-residents,having business connection in India will be required to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil.
The amendment will apply to all past transactions concerning assets in India.
Commenting on the government move,PwC Direct Tax Leader Rahul Garg said: “This amendment is to seek an overturn to the ruling of the Supreme Court judgment on mainly two cases– Vodafone and Azadi Bachao Andolan.”
In the Azadi Bachao Andolan case,it was held that an entity having a tax remittance certificate from Mauritius would be exempt from paying tax in India.
The changes in the Income Tax Act,according to experts,will also have a bearing on about 500 overseas deals of similar kind,experts said.
As per the proposed changes in IT Act,1961,any asset which is registered or incorporated outside India shall be deemed to be situated in India “if the share or interest derives,directly or indirectly,its value substantially from the assets located in India.
“These amendments will take effect retrospectively from April 1,1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years,” says the Memorandum to the Finance Bill,2012.
The amendment may have implications on Vodafone case in which the Supreme Court had held that the Income Tax department does not have the jurisdiction to levy Rs 11,000 crore as withholding tax on Vodafone for its USD 11 billion acquisition deal with Hutchison Essar in 2007.
Reacting to the proposal,Hitesh Sharma,Ernst & Young Tax Partner,said: “Going forward the corporates will want a certainty and clarity on indirect transfer of withholding tax”.
“It was not clear how far it is possible for the government to penalise an entity after issuing clarification with retrospective effect. We shall have to wait for the Supreme Court verdict on this,” Sharma added.
Ved Jain,Chairman of Assocham Direct Tax Committee,also opposed it by saying,”there should not be any amendment ..You cannot tax whatever has not been taxed before. Industry is not in favour of this proposal”.
On February 17,the government filed a review petition before the Supreme Court on its judgement on Vodafone matter.
The apex court had set aside the tax demand on Vodafone and quashed the ruling of the Bombay High Court asking the UK based telecom major to pay Rs 11,000 crore tax.
Commenting on the Budget proposal,ICICI Bank CEO and MD Chanda Kochhar said,”My general belief is that anything that is being changed should be prospective and not retrospective because a retrospective change does create a lot of doubt in the minds of the people abroad”.
Similar Vodafone like cases which are pending before various courts,or other appellate authorities,include those of Cairn UK Holding Ltd,Unilever HPC Finance Service Inc USA,Accenture Services Pvt Ltd,Euro Pacific Security Ltd,Tata Industries Ltd,AT&T,Mcleod Russel India,SAB Miller (A&A) and Sanofi Pasteur Holding SA.
Sunil Jain,member of law firm J Sagar & Associates,said: “In the interest of stability and certainty of fiscal and regulatory policy,it is desirable that major changes of law are carried our prospectively”.