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The Finance Ministry has virtually ruled out a rethink on the proposed controversial tax amendments that seek to bring all Vodafone-Hutchison type offshore transactions into the tax net.
The current stance seems largely driven by the fact that taxation of indirect transfers could result in additional revenues of Rs 35,000-40,000 crore.
This is despite the concerns voiced by two industry chambers — FICCI and CII — that retrospective amendments to tax laws would dampen business sentiments and lower the morale of foreign and domestic investors.
Defending the spate of amendments proposed in the Budget to bring offshore transactions into the tax net, the Finance Secretary, Mr R.S Gujral, saw merit in bringing Vodafone and other similar cases to tax, even from the standpoint of equity.
In a post-Budget interaction with industry associations here on Sunday, Mr Gujral said the proposed amendments were only to make the intention of legislature clear about what the actual interpretation of the tax law is. Once the amendments are made, there will be certainty that all such offshore transactions were always “susceptible to tax”, he said.
The retrospective amendment is being done from April 1,1962 as the clarification has to be made effective from the date the income-tax law came into force. This does not mean the Income Tax Department will open all cases of indirect transfer of shares with underlying Indian assets from April 1962 onward, the Finance Minister, Mr Pranab Mukherjee, clarified.
The Department will restrict itself to the limitation period of six assessment years, which implies that transactions beyond the six-year period would not be opened.
Dampen investor sentiment
The FICCI President, Mr R.V. Kanoria, said regardless of how compelling the reasons may be, retrospective amendments in laws would do little for confidence-building and were a dampener for foreign and domestic investors.
The CII President, Mr B. Muthuraman, said making changes, seemingly substantive and retrospective in tax laws, would make investors “question our governance and legal systems. This might create an impression of India being investor-unfriendly at a time when we need urgent investment”.
Mr Gujral said that the Vodafone case was not oneof double taxation. Rather, it is a situation where no tax had been paid on such sale anywhere. It is not desirable that such capital gains not be taxed anywhere in the world, he added.
He asserted that retrospective amendments would not have any negative impact on foreign direct investment (FDI) inflows, which had increased in China despite that country levying 15 per cent tax on similar offshore transactions. “FDI does not come because of zero tax. It comes where profits are to be made,” Mr Gujral said.
However, tax experts have a different take on the timing of the proposed changes. “The Vodafone controversy has spanned four years. If the move is to clarify on the legislative intent, why was it not done at the first available opportunity in 2008 itself? What is being done now through the Finance Bill is only after the Supreme Court's positive ruling was given, and that too to negate it,” said Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas.
krsrivats@thehindu.co.in
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