The government may have to take a hit of Rs 11,000 crore in tax revenue, with the Supreme Court’s ruling in favour of Vodafone in a long-pending tax dispute. The revenue loss may go up if the verdict has a bearing on similar deals pending before various courts. But the government could introduce amendments to tax laws, negating impact of this decision on future deals.
Prospective investors may not benefit from the Vodafone case, as provisions under the proposed Direct Taxes Code (DTC) make income from such cross-border deals liable to tax in India. As the DTC rollout is likely to be delayed, experts say the finance ministry may make some provisions in the Income-Tax Act itself in the upcoming Budget, to bring such income to taxation in all future transactions.
“While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India, the victory may be short-lived, as they have other aces up their sleeves. The General Anti-Avoidance Rules and amendments to the tax law can be expected to be brought in the Budget 2012 itself,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
PwC India executive director Sandeep Ladda said since DTC contained a proposal to tax similar transactions, this ruling might have limited relevance after its implementation.
Some experts said though tax revenue from other similar cases pending before courts might not be huge, a retrospective amendment to the law to tax past transactions could not be ruled out.
“There are several grey areas which will come into play. One cannot rule out an amendment with retrospective effect,” said Hitesh Sharma, tax partner, Ernst & Young.
Tax on cross-border deals is levied in the range of 10 to 20 per cent. Idea Cellular-AT&T deal of $150 million, GE-Genpact ($500 million), Mitsui-Vedanta ($981 million), SABmiller-Fosters and Sanofi-aventis-Shantha Biotech ($770 million) are some other disputed cases.
The decision was a setback to the finance ministry, grappling with an expected shortfall in revenue collections. Immediately after the verdict, finance minister Pranab Mukherjee met law minister Salman Khurshid and senior officials of the ministry. A core group, comprising senior officials from the tax department, has been formed to examine the judgment.
“We obviously need revenue for the government’s important programmes and the other thing is the certainty in law — we have to examine both areas,” Khurshid told reporters after the meeting.
While Central Board of Direct Taxes chairman M C Joshi told Business Standard that the government would examine the judgment before deciding a future course of action, another finance ministry official said the only option available was to seek a review of the judgment.
Pranay Bhatia, associate partner, Economic Laws Practice, however, said the process of seeking a review could take long and even if the government chose to take that recourse, the possibility was that even a larger bench might not take a different view.
After the Bombay High Court passed an order in 2010, asking Vodafone to pay Rs 11,000 crore to the Income Tax department, the tax authorities got confident that they had acted lawfully in the matter. Besides, Vodafone’s decision in July 2011 to withdraw its petition before a tax authority — contesting its liability to pay withholding tax of about Rs 3,500 crore on the purchase of stake in Vodafone Essar from its joint venture partner, Essar Group — made the government confident of a victory in the main case, too.
While Vodafone had given a bank guarantee of Rs 8,500 crore, it had already paid Rs 2,500 crore to the tax department, which will now be returned within two months with four per cent interest.
