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Vodafone tax verdict good for FDI: analysts

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The Supreme Court's verdict in the overseas transaction tax case against Vodafone is likely to boost the foreign investor sentiment in India and give respite to other litigants in similar type of cases, believe experts.

The apex court today said the I-T Department has "no jurisdiction" to levy tax on overseas transaction between companies incorporated outside India and ruled that Vodafone is not liable for taxes and penalties worth $4.4 billion.

Though the government will lose out in terms of revenue, the decision is likely to act as a catalyst for future investments and has sent the right signal to the world, especially to investors who want to invest in India.

"This settles a prolonged litigation which had created a lot of uncertainty for multinationals having similar structures and/or who had entered into or were proposing to enter into similar transactions," PwC India Executive Director Sandeep Ladda said.

Nitesh Mehta, Client Service Director, Tax & Regulatory, Walker, Chandiok & Co, also believes "this is a significant ruling which brings a sigh of relief for the taxpayers facing similar issues."

Some of the major transactions in the recent past over which multinationals are fighting similar tax cases in India include ABMiller's buyout of Foster, Sanofi Aventis' acquisition of Shanta Biotech, Kraft Food's purchase of Cadbury's and Vedanta's takeover of Cairn India.

Ladda said, "This should provide much-needed respite to other litigants in other cases where the 'Vodafone controversy' had been initiated by the revenue authorities and is currently pending at various stages of litigation across the country."

However, he added that "any conclusions in this regard in each individual case can only be reached based on the fine print analysis of the judgement".

The Direct Taxes Code Bill contains a proposal to tax similar transactions and hence, "This ruling may have limited relevance post-implementation of the DTC," Ladda said.

However, experts are apprehensive that the government could introduce amendments to tax laws, which could negate the impact of this decision.

"While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India, the victory may be short-lived as they have other aces up their sleeves -- the General Anti-Avoidance Rules and amendments in the tax law -- which can be expected to be brought in the Budget 2012 itself," Deloitte Haskins & Sells Partner Neeru Ahuja said.

Echoing a similar opinion, Walker, Chandiok & Co's Mehta said, "We need to look at the upcoming Budget to see if the government introduces any amendments to negate the impact of this decision."

As per global consultancy firm Grant Thornton, out of the $10 billion in deals seen during 2011, seven were inbound.

In the backdrop of existing Eurozone uncertainty, the growing domestic market makes Indian targets a safer bet and judgements like this could boost inbound deals significantly, believe experts.

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