Comments
Ruling in favour of Vodafone in January 2012, the Supreme Court had discharged the telecom major from withholding obligations in respect of its $11.2 billion deal with Hutchison Whampoa in 2007. Subsequently, Finance Act 2012 introduced retrospective amendments in the income-tax law to overcome the Supreme Court verdict in the Vodafone case. The Committee on General Anti-Avoidance Rule (GAAR), headed by Parthasarathi Shome, unveiled the draft report on indirect transfer on October 9.
Key Recommendations
The committee recommended that retrospective provisions for taxation of indirect transfer are not clarificatory in nature, and an amendment intended merely to widen the tax base is against the basic tenets of law. Accordingly, it recommended applying the amendments prospectively.
However, if retrospection is accepted, adequate safeguards are needed in the form of interest and penalty waiver on the tax demands raised by the retrospective amendment, and only the party making capital gains (seller) abroad should be taxed. The panel also recommended exemption for certain categories of small investors, transfer of shares of listed company, certain intra-group restructurings, and investors in FII and Participatory Notes (P-Note).
To allay taxpayer concerns, the panel defined the various terms used in the income tax provisions relating to indirect transfer. It also recommended that “transfer” as defined in income tax law should be read with the source rule, to determine taxability from transfer of capital assets in India.
Conflict with tax treaties
The panel recommended that treaty relief (if any) should be available to non-residents for indirect share transfer. Also, offshore transfers should be taxable in India only if the treaty provides right of taxation of capital gains to India based on its domestic law, or if the treaty specifically provides right of taxation to India on transfer of shares or interest in a foreign company or entity.
Certain open issues
Exempted categories such as investors in FII or P-Notes may breathe a sigh of relief as they are kept out of the tax net. The Shome panel has, no doubt, cleared the air on indirect tax provisions, but some issues remain unaddressed. Practical difficulties remain in determining fair-market value, classification of assets (long- or short-term), determining cost of acquisition, and availability of information on assets acquired. Going by global practices, the extent of indirect transfer provisions requires more examination and testing.
The recommendations of the committee have addressed the concerns of foreign investors to a large extent. Its acceptance promises to reduce uncertainty on the taxability of such transactions. Indirect transfer provisions applied retrospectively may create difficulties in compliance, implementation, and enforcement. The Government has to decide whether it wants to dilute the provisions on retrospective changes, or just allow interest and penalty waiver. It would be interesting to observe how it responds to the recommendations.
(Rajesh Patil is Senior Manager and Nisha Gopalani is Deputy Manager, Deloitte Haskins & Sells)
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.