Good news for investment

The Vodafone judgment might as well be a blessing from the Supreme Court for those tax lawyers and accountants who have been struggling to convince foreign companies to invest in India.

Rajiv Luthra, the founder and managing partner of Luthra & Luthra believes that the judgment will being in more clarity, as uncertainty on how the system would work has been taken away.

“Though it was just one of the nails in the system, it will improve the environment considerably,” said Luthra.

With many such test cases which the Income Tax Department has been trying to claim tax from, foreign investors have been confused on the ways to work around the tax code of this country.

As much as 80 per cent of foreign companies in India are facing huge tax litigations, and this move could be a game changer. “Tax efficiency created through such structures, which now have the ultimate legal blessing, will surely provide a fillip to foreign direct investment into India," said Sanjay Sakhuja, CEO, Ambit Corporate Finance.  

Nishith Desai, the head of international law firm, Nishith Desai and Associates, said that the freedom to go ahead with such transactions has now been established. “It makes a lot of difference. We spend around  25-30 per cent of our deal-making time in negotiating tax indemnities. Now, that will come down,” he said. Probir Rao, MD of Jefferies India said that it will bring down the potential cost of transactions.

Foreign investors, experts say, demand certainty in law. There has been a lot of ire against the tax claim also because the claim was sought retrospectively. “Foreign companies are also perturbed because tax was demanded from the purchaser and not the seller,” said N C Hegde, partner-direct taxes at Deloitte.

Corporate tax lawyer H P Ranina believes that since many countries, especially China, tax transactions which are done by overseas entities involving domestic assets, it could mean an advantage to India. “The decision shows the absolute independence of judiciary and integrity, it makes India a fine investment destination. Other countries are much more stricter,” he said.

The cheer, however, could come to an end, if the proposed amendment in the Direct Tax Code goes through. The amendment proposes to tax such cases which have assets in India, but are either sold or bought through international vehicles. This might just neutralise the effect of this judgment. Direct Tax Code which is intended to take effect from April 2012, might be tabled in front of the Parliament in the next Budget session.

Rao said that new provisions like General Anti-Avoidance Rules, Controlled Foreign Corporations (CFC) and change in residence norms in case of company incorporated outside India have been proposed to tackle tax leakage on such fronts.

“This decision clearly puts to rest the issue of taxability of offshore transactions of offshore companies. Therefore, it should apply to past and future transactions. If, however, the proposal of the Direct Tax Code which indicates the government intent to tax such offshore transactions in India, if the government does attempt to do that, it would be quite unfortunate given the unequivocal ruling of the highest court of the land,” said Ketan Dalal, joint leader of tax practice at PriceWaterhouseCoopers.