Govt set to accept Shome panel report on retrospective taxation

Vodafone tax case likely to be tackled as per the panels framework

As in the case of General Anti Avoidance Rules (GAAR), the government appears set to accept the recommendations of Parthasarathi Shome panel on application of retrospective taxation clauses introduced in the Income Tax Act through Finance Act, 2012.

The issue is significant as Finance minister P Chidambaram would be in London tomorrow in the last leg of his tour to Hong Kong, Singapore, Frankfurt and the capital city of UK to address foreign investors’ concerns.

Chidambaram is likely to indicate the government’s thinking on retrospective taxation in London with British telecom major Vodafone being at the centre of the whole issue.

The Shome committee in its draft report had advised the government against implementation of tax rule changes retrospectively and had favoured prospective taxation.

It had also suggested that the retrospective taxation should be done in the rarest of rare cases and it should be levied on the entity which had made capital gains. The panel also suggested waiver of penalty and interest in such cases.

The Shome panel submitted its final report in November which is awaiting finance ministry’s approval currently.

The government’s decision on the Shome panel recommendations will have a direct impact on the Vodafone tax case, which is facing over Rs 11,000 crore tax demand on acquisition of Hutch’s assets in India.

The Income Tax Department had originally raised a demand of Rs 7,900 crore on Vodafone on its acquisition of Hutchinson's stake in Hutch-Essar through a deal in Cayman Islands in 2007.

Sources in the know of the development said though the Vodafone case was still in the Supreme Court, the government could go ahead and take its call on the retrospective tax laws.

The government’s move on the legal front in the Vodafone case and on the changes in law pertaining to retrospective taxation could go on simultaneously, said a senior finance ministry official.

He added that basic principle of retrospective taxation was likely to be framed according to the Shome panel recommendations and then government would look at a solution to the Votafone tax issue, confirming to these norms.

Tax experts indicate that with the acceptance of Shome panel recommendations, rather than demanding withholding tax from Vodafone, the income tax department would look at collecting the tax from Hutch which has made capital gains on the deal.

A senior income tax department official said that income tax department would be able to collect taxes on the deal without going out of the bounds of Shome committee recommendations, if the government decides to do so.