The Parthasarathi Shome panel has given some relief to Vodafone by recommending tax should be collected from the seller of Indian assets, but the government may not find it easy to recover the tax dues from Hutchison which made capital gains in this case and has no presence in India today.
Experts said asking the seller, especially non-residents, to pay the tax on past deals when the law was not clear could lead to another round of legal battle between the government and those companies. This may leave the government with the only option to apply the law prospectively. That would need an amendment in the Income Tax Act, which can be done in the Winter Session of Parliament.
The Shome committee, in its report released for public feedback on Tuesday, had said treating a person as an assessee in default or as a representative assessee of a non-resident would amount to the imposition of a burden of impossibility of performance. It thus proposed tax on past deals, if at all it needs to be collected, should be from the company making the capital gains and not the buyer of assets.
“As per the law (after amendments to the Finance Act), the government has the right to tax capital gains made by Hutchison by sending a demand notice at its Cayman Islands address. But the seller may challenge the jurisdiction. That may lead to another legal fight,” said Uday Ved, head of tax, KPMG.
Under the law, the liability to pay the tax is on the seller. However, in 2007 Hutchison sold its entire stake in Hutch Essar to UK-based Vodafone for $11 billion. The Hong Kong based country has no presence in India now. The tax department sent a notice to Vodafone treating it a representative of Hutchison in India. The department argued that Vodafone failed to withhold tax of Rs 7,900 crore while making payment to Hutchison. The Supreme Court, however, had decided in favour of Vodafone. The government later amended the law and put a validation clause to restore the tax demand.
“Tax is always paid by the seller and you cannot push the payer beyond a point. But the Shome panel has not considered individual cases and the tax department may face practical difficulties in collecting tax from the seller in some cases. Facts of the each case are different and they may decide to go after the payer wherever the case is pending against him,” said Sudhir Kapadia, National Tax Leader, Ernst & Young.
Experts said if the transaction is taxable as per law and India has jurisdiction there won’t be an issue as far as sending the notice to a non-resident is concerned. Tax authorities can raise a demand and even go for government level negotiations. However, the company which has been served the tax notice can challenge it on retrospectively part arguing the amendments are not clarificatory in nature as stressed by the finance ministry in Parliament.
The Shome panel had also said the 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.
Earlier this week, Finance Minister P Chidambaaram had said the government would not wait for the Budget session address concerns of the industry over retrospective taxation.
“We should move whatever changes have to be brought about in Parliament as early as possible… One thing I’m very clear resolution of tax disputes, both pending and anticipated, is good for the country, good for the economy and good for the industry. So we must find a way to resolve the issue,” he said.