FinMin officials say bringing overseas deal under tax net creates uncertainty

"Pursuant to an amendment to Section 9 of the Income Tax Act, all mergers and acquisitions occurring outside India may now have potential Indian tax implications," said a working paper authored by senior economic adviser HAC Prasad in the Department of Economic Affairs along with two other officials. 

 

The amendments creates tremendous uncertainty in evaluating and pursuing acquisitions outside of India, the paper titled 'Emerging Global Economic Situation: Opportunities and Policy Issues for Services Sector', further said. 

 

However, the paper clarified that these views are of authors and not the finance ministry. 

 

The paper also said that the Indian government is enacting exemptions from Indian taxation for mergers and acquisitions occurring outside India. 

 

Amendment to Section 9 of the Income Tax Act with retrospective effect of 1961 was carried out to bring deals like Vodafone under the tax net. 

 

Section 9 of the Act said that income is deemed to accrue or arise in India (directly or indirectly) through or from any business connection, property, asset, source of income, or transfer of a capital asset situated in India.

 

Based on this law, the Income Tax Department had issued notice to Vodafone for the $11 billion deal stating that they are in default of payment of Capital Gain Tax of around Rs 8,000 crore for a purchase of an Indian company – HEL from HTIL by Vodafone.

 

Following the Supreme Court judgement that such tax cannot be imposed on Vodafone because the transaction was an overseas one and India lacked tax jurisdiction, the finance ministry amended Section 9.

 

The amendment made it mandatory for all persons, whether residents or non-residents, having business connection in India, to deduct tax at source and pay it to the government even if the deal is executed on foreign ground.

 

The government had also referred the issue to a panel headed by noted tax expert Parthasarthi Shome. The panel had recommended that changes to tax laws be brought prospectively. In case of retrospective amendments, interest and penalty be waived.  

 

Recently, efforts to go for conciliation with Vodafone over Rs 20,000 crore tax dispute failed. The Finance Ministry’s proposal to withdraw the conciliation process was supported by the Law Ministry. 

 

Now, after the Cabinet’s nod, the Income-tax Department would pursue the tax demand notice that has been put on hold in view of the conciliation talks. 

 

The I-T department had raised the basic tax demand to the tune of Rs 7,990 crore, the penalty and accrued interest has taken this figure to Rs.20,000 crore. 

 

Other tax issues raised by the paper for services sector are:

 

i) Establish a specified time frame for refunding taxes, particularly when the income tax authorities, tribunals and courts have issued judgement or decision in favour of the assessee

 

ii) As a matter of right, allow a set-off of the refunded amount against any tax demand

 

iii) Establish a grievance procedure for addressing issues when an assessee finds the proceedings before an officer unreasonable and irrational.