The fate of the proposed move to amend the Income Tax Act with retrospective effect, in view of the Supreme Court judgment on Vodafone, hangs in the balance. With the Supreme Court not entertaining the review petition, the tax collected will be refunded, as stated by Corporate Affairs Minister, Mr Salman Khurshid. Whether the government goes ahead with the proposed amendment remains to be seen.
The Sovereign state has the power to enact laws, including retrospective amendments. The retrospective amendments to Sec 2(14), 2(47) and Sec 9 of the Income Tax Act proposed in the Finance Minister's speech, primarily with transactions like Vodafone in mind, is disheartening for FDI investors. While the corporate realm was rejoicing due to the Supreme Court verdict on the subject, as well as the apex court's rejection of the review petition, the proposed amendment remains a worrisome issue.
INTERNATIONAL INVESTORS
A provision to tax transactions with substantial underlying assets located in India was already under consideration in the Direct Tax Code. The DTC sought to indirectly provide for taxation of transfer of shares of a foreign company having underlying Indian assets by excluding gains arising on transfer of shares of a foreign company, direct or indirect, if assets held by such foreign company in India at any time during the preceding year constituted less than half of its total assets. Given that the introduction of DTC stands delayed, it was widely believed that a similar provision would be introduced in the Finance Bill this year, but it was anticipated to be prospective to give more clarity to companies at the time of planning their transactions. This would have been good governance.
Apart from Vodafone, the fate of open litigations with similar issues like Richter Holding Ltd, AT&T, E*Trade, Sanofi–Shantha, Genpact,
CAPITAL ASSET
The Supreme Court held in Vodafone's case that “controlling interest” is not a capital asset. Budget 2012 proposes to amend the definition of “capital asset” to include controlling interest in an Indian company. It states that any rights in or in relation to an Indian company, including rights of management of control or any other rights whatsoever will deemed to be regarded as “capital asset”. One of the arguments of the tax department in the Vodafone case was that there was an “extinguishment” of rights under the provisions of the Income-Tax Act. Therefore, there is a transfer which gives rise to taxable income. Budget 2012 proposes to amend the definition of transfer to specifically include disposition or parting with any interest directly or indirectly, irrespective of such transfer being effected or dependent upon, or flowing from transfer of shares of company incorporated abroad. The Supreme Court held in Vodafone's case that the words “directly or indirectly” don't qualify the transfer of the asset. If the government does press ahead with the amendment to the Finance Bill, it wouldn't go down well with international investors.
(The author is Partner and Practice Leader, Walker Chandiok & Co. Views expressed are personal.)