I-T LAW MAY BE AMENDED FOR FOREIGN DEALS The finance ministry is
considering amending the income-tax act empowering the tax authorities
to spare companies from paying penalty as well as interest on taxes
levied on indirect transfer of Indian assets through sale of shares
abroad. Tax experts say the measure, if incorporated in the upcoming
budget, will be applicable to a clutch of transactions carried out in
recent
years, notably Vodafones acquisition of Indian telecom major
Hutch Essar, Foster Australias sale of its Indian arm to SABMiller and
the acquisition of Idea Cellular by the Aditya Birla group. Senior
officials in the tax department confirmed that a change in the incometax
act was being considered. While the assessing officer dealing with a
particular case has the power to exempt a taxpayer from interest and
penalties, the thinking in the ministry is that changing the law to
provide statutory backing would make the tax regime more predictable.
The tax department officials cautioned that a final decision had not
been reached. Further, its not clear whether interest would be totally
scrapped or only in part. The need for a provision to explicitly waive
penalty and interest on the tax payable on such cross-border deals
arises from a provision in the 2012-13 budget, which was inserted to
retrospectively tax past cross-border deals. The current thinking was
that interest could be charged from the day the controversial
retrospective amendment came into force. The retrospective amendment was
unveiled when the budget was presented to Parliament on March 16, 2012.
The budget was passed by Parliament on May last year and the President
gave her assent later that month. T P Ostwal, senior chartered
accountant told ET Its only fair to the taxpayer not to charge interest
for a period in which he was not sure whether to pay tax in India or
not. The tax demand on cross-border acquisitions of Indian assets or
companies would cross about Rs. 60,000 crore and half of this amount is
accounted for by interest and penalty, according to an informal estimate
prepared by the income-tax department. Lakshmi Narayanan, Head of Tax
Deloitte India told ET: There are already guidelines to waive off
penalty and interest in such cases. However, if it comes as a law there
will be a greater clarity on such issues. The Income-tax department last
month issued a tax demand of about Rs. 14,000 crore to Vodafone in the
first week of January. Of this, the original tax demand is just over Rs.
7,000 crore, the rest being interest calculated from 2007. The
provision was introduced after the Supreme Court ruled that Vodafone
could not be taxed in India on its acquisition of Hutchison-Essar in
2007. The transaction effected in 2007 involved the purchase by Vodafone
of a controlling 67% stake in Hutch-Essar from a company controlled by
Hong Kong's Hutchison International. Since then the Indian tax
authorities have pursued Vodafone on the ground that it has not withheld
tax. Vodafone denies that the transaction is taxable. The furor over
the tax claim has hurt Indias regime as a major global investment
destination prompting a rethink on the part of the authorities. A
committee, headed By Parthasarathi Shome, a tax expert, has recommended
that the law should be made prospective. As an alternative he had
suggested waiving interest and penalty. –
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