The Union Budget 2012, which was presented last week on March 16 proposed a controversial retrospective amendment with effect from April 1, 1962 to tax cross border transactions like the Vodafone - Hutch Deal.
The Union Budget 2012, which was presented last week on March 16, apart from bringing several amendments to the Income Tax Act, 1961 (the Act) has also proposed a controversial retrospective amendment with effect from April 1, 1962 to tax cross border transactions like the Vodafone - Hutch Deal.
The Union Budget has made retrospective amendments to Sections 9 and Section 2 (definitions of ‘capital asset’ and ‘transfer’) and the amendments intent to be clarificatory in nature.
Clause 4 of the Finance Bill provides: In section 9 of the Act, in sub-section (1)-
(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:-
“Explanation 4: For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.”
“Explanation 5: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share of the interest derives, directly or indirectly, its value substantially from the assets located in India.”
There were apprehensions in certain quarters that the Vodafone decision may pre-empt an amendment to the tax laws to provide support to the tax authorities to tax such similar transactions in future. However, the amendments were not expected to be retrospective in nature and the fact it could date back 50 years.
In January, the Supreme Court had decided in favor of Vodafone in the ongoing tussle regarding payment of dues. The UK Company was slapped with a $2.6 billion notice for non-payment of taxes following its purchase of a 67 percent stake in Indian mobile operator Hutchison Essar.
The Supreme Court held that the Government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands and Indian authorities have no jurisdiction over transactions, which have taken place outside the country.
However, this amendment seems to have now overruled the decision of the Supreme Court and will now have implications not only on the Vodafone decision which won the Rs 11,000-crore tax dispute case against tax authorities in the Supreme Court but also on all other cross border transactions involving ‘indirect transfers of shares’ which have derived value substantially from assets located in India.
Bar & Bench spoke to Vodafone Counsel Anuradha Dutt, Partner at Dutt Menon Dunmorrsett and Amarchand Mangaldas Tax Partner Aseem Chawla
Vodafone Counsel Anuradha Dutt has reacted very strongly to this retrospective amendment. Dutt is extremely disappointed with the retrospective amendments made to section 9 and 195 and that too with effect from 1962, 50 years back.
Anuradha said, “It brings out the lack of vision of the present leaders in power. The government has chosen to not only send a signal to the world that I
ndia has no rule of law as it can overturn judgments of the Supreme Court of India by bringing in retrospective amendments but they have chosen to do so when the Indian economy desperately needs capital infusion, particularly foreign direct investment."
Anuradha added, “In a climate of political uncertainty when the government does not have the political will or support to bring about reforms to encourage foreign direct investment, it is a Himalayan blunder to vitiate the climate and send negative signals to the foreign investors. To my mind, this one act will force investors to look at other developing nations for investment. Even China, which has dictatorship, did not bring in a retrospective amendment dating back 50 years to tax foreign transactions which have an effect on domestic companies' control.
She observed that the amendments therefore appear to be a shortsighted measure for a short-term gain and loses sight of the long-term implication of such an amendment. According to Anuradha, the amendment has undone, the picture that India has been trying to project for the last few years in global economic forums of being a mature democracy having a matured and visionary political class and a mature judicial system which has the power to implement rule of law.
Talking about the impact of the proposed amendment on Vodafone case, Anuradha said, “The retrospective amendment claiming to be clarificatory is infact substantial and seeks to unsettle all completed transactions. If this amendment is passed by the Parliament and becomes a part of the finance act and is used by the revenue to reopen Vodafone case then ourselves Vodafone will have to challenge the retrospective operation of the same as it is ex-facie illegal”.
“This one action of the Budget will force investors to look for safer countries for investments where there is certainty in law and tax practice. It is therefore a retrograde step and will adversely affect the Indian economy in the coming years”, concluded Dutt.
Aseem Chawla, Partner - Amarchand Mangaldas
If one looks at expanding the principles of source based taxation, the most notable instance was the Vodafone tax case, which was pursued by tax authorities for the last four years, which ultimately got settled through a pragmatic decision of the Hon’ble Supreme Court.
Aseem while talking about the Vodafone decision said, “The concurring judgment of Justice Radhakrishnan laid down certain ground rules with regard to withholding tax prescription under Section 195 i.e. a situation in which there is an obligation to withhold tax in case of non-residents. The concurring judgment of Radhakrishnan did describe the fact that Section 195 obligations would not inure in the case of non-resident and the fact that unless a non-resident has a taxable presence or a place of business in India, the non-resident should not be obligated or saddled with the obligation of withholding of taxes”.
“However, this has now been overturned completely in its pith and substance. Section 195 will stand amended till the present proposal were to see the light of the day and therefore non resident would be obligated to withhold tax regardless of the fact that they have a business in India”, said Aseem.
The principle highlight of the Vodafone case was whether an offshore transfer of assets or shares would be taxable in India assuming that the offshore transfer of shares or interest had a consequential effect, which is commonly known as indirect transfer of shares.
Aseem added, “The proposed amendments in Section 9 suggest the fact that the decision has been analyzed threadbare and these provisions have been proposed to simply overturn the dictum of the Supreme Court. In other words, a principle measure has be undertaken by the present the Finance Bill to tax offshore transfer of shares resulting in indirect transfers.
Apart from that, the most notable feature of the Finance Bill is introduction of clause 113, which is the validation clause. The proposed validation clause provides that where there is an income accruing or arising from transfer of capital assets situated in India pursuant to indirect transfers of shares outside India, any tax proceedings or levy of taxes or process of collection of recovery of such taxes shall not be invalidated on the ground that such incomes is not chargeable to tax or such taxes arising out of transaction taken place outside India.
The far-reaching proposal in the validating clause is that such provisions shall operate notwithstanding anything contained in any other judgment or tribunal or court order or authority. It remains to be seen whether this validation clause has been solely introduced with the intention of usurping the decision of Vodafone tax case”.
On the impact of this move on foreign investment flows, Aseem said, “Clearly, with these proposals, message has been sent to the rest of the world including foreign investor community that India will tax indirect transfer regardless of the Vodafone decision, which was viewed as something more than the need of the hour, which makes an emphasis on the rational of the foreign direct investment. Clearly a well thought out proposal is now on the cards that whatever the impact it may have on the foreign direct investment, the tax policy is very clear. The silver lining is the fact that uncertainty with regard to indirect transfer of shares has been put to rest by virtue of these emphatic though far reaching tax proposals but the corollary effect is that with this clear statement of intent and purpose, is India willing to compromise on its efficacy as an investor friendly destination considering when the country is still starved for capital and for commitments on infrastructure and otherwise”.
Finance Ministry’s stand on Retrospective Amendments
In the last two days, the Finance Ministry officials at various foras have given following clarifications putting across the various reasons for bringing out these retrospective amendments: