Tax indirect transfers prospectively: Shome

Asks govt to avoid fundamental changes in tax provisions without consultations

The Parthasarthi Shome panel on Tuesday recommended that indirect transfer of Indian assets be taxed prospectively and retrospective taxation should happen only in the rarest of rare cases. That would provide relief to Vodafone and other companies fearing demand notices from the income tax department on their past deals involving transfer of Indian assets.

The committee noted even if the government decided to opt for retrospective taxation of indirect transfers, the tax should be paid by the company that made capital gains and the penalty and the interest should be waived. If this recommendation is accepted by the government, Hutchison could become liable for paying tax in the Vodafone case.

 

The panel observed that amendments to the Income Tax Act made through the Finance Act of 2012 were not clarificatory and instead would tend to widen the tax base. President Pranab Mukherjee, who had introduced the provisions as the then finance minister, had maintained the amendments were made to clarify that the intent of the government had always been to tax the indirect transfer of Indian assets.

THE PANEL’S TAKE

• Retrospective tax should apply only in exceptional or the rarest of rare cases
• Finance Act provisions on taxation of indirect transfers not clarificatory 
• Levy tax only on taxpayer who earned capital gains from indirect transfer
• No interest, penalty should be levied on account of retrospective changes
• Capital asset deemed situated in India if it derives over 50% of global assets of entity
• Exempt foreign company listed on a recognised bourse, intra-group rejig
• Exempt PE investors, non-resident investors of FIIs like P-note holders
• Dividend paid by a foreign company not to be deemed to accrue or arise in India
• Capital gains tax won’t apply if there’s a DTAA with the country of the non-resident
• Recommendations may be implemented through changes to I-T Act, issuing circular

Industry and tax experts, who had strongly opposed the retrospective amendment hurting “investor sentiment”, welcomed the report. CII Director General Chandrajit Banerjee said it would improve sentiment. Ficci President R V Kanoria said it would bring about certainty in the tax policy and lay down the ground rules for retrospective legislation in tax matters.

The recommendations may be carried out through amendment of the Income Tax Act, 1961 or the Income Tax Rules, 1962 or by way of an explanatory circular. The panel asked the government to avoid introducing fundamental changes in tax provisions without consultations.