No escape for Vodafone-like deals
Finance Minister Pranab Mukherjee’s statement today on the Finance Bill had almost raised the hopes of the industry vis-à-vis the retrospective taxation when he said the clarificatory amendments would not over-ride the DTAA (double taxation avoidance agreement) treaty. However, a between-the-line reading of the FM statement made it clear, to analysts and companies looking for relief, that not much has changed.
From the point of view of the government, it would continue to try and get Rs 35,000 crore to Rs 40,000 crore in taxes from cross-border deals such as Vodafone-Hutch and others like Idea-AT&T, GE-Genpact, Mitsui-Vedanta, SABMiller-Fosters and Sanofi-Aventus-Shantha. Cases related to taxation from many of these deals are pending in various courts across the country.
The FM’s statement that gave some hope to the industry, except for Vodafone perhaps, read: “A provision in the Finance Bill which seeks to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on sale of assets located in India through indirect transfers abroad, has been intensely debated in the country and outside. I would like to confirm that clarificatory amendments do not over-ride the provisions of DTAA which India has with 82 countries.” He said, “It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA.”
However, the FM’s next line spoilt it all. “The retrospective clarificatory amendments now under consideration of Parliament will not be used to reopen any cases where assessment orders have already been finalised.” He stressed, “I have asked the Central Board of Direct taxes to issue a policy circular to clearly state this position after the passage of the Finance Bill.”
UK-based telecom major Vodafone, which is fighting a $2.2-billion tax case for five years over its $11-billion deal to buy Hutchison Whampoa’s Indian assets, continues to be in a spot. One, the Vodafone-Hutch transaction had taken place in Cayman Islands, with which India does not have a DTAA pact. Also, it is a case where assessment order has been finalised.
This does not help Vodafone because the transaction with Hutch happened in Cayman Islands with which India does not have a tax treaty, said Daksha Baxi, executive director, Khaitan & Co. “Capital gains tax is the seller’s primary liability, but in case of non-resident seller, Indian laws put an obligation on the buyer to withhold the Indian capital gains tax,” Baxi said.
A finance ministry official clarified that most of the Vodafone-like transactions were routed through tax havens which do not have a DTAA with India. Though some deals were routed through DTAA countries, India has the right to tax such transactions under treaties with those countries, he added.
Among the Vodafone-like deals is the $150-million Idea Cellular-AT&T deal which was transacted in Mauritius, with which India has a DTAA pact. Also, the $500-million GE-Genpact deal was done in the US, another country with which India has DTAA.
Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG India, pointed out, “The government seems to be persistent with the introduction of retrospective amendment for taxation of overseas transfer.” Kanabar called the statement made by the finance minister that assessments which have attained finality will not be reopened “very interesting”.
Rahul Garg, executive director, PricewaterhouseCoopers, told Business Standard that the “announcements made today do not change the position in regard to applicability of treaty in respect to transaction that are already under investigation”.