Govt to amend law to tax Vodafone-like deals

New Delhi: The government today proposed amending the Income Tax Act with retrospective effect to bring into net overseas transactions like the Vodafone-Hutchison, estimated to have tax implications totalling about Rs 40,000 crore.

The amendments, once carried out, will have implication for the Vodafone which won Rs 11,000 crore case against the tax authorities in the Supreme Court.

While Finance Minister Pranab Mukherjee defended the government`s decision to amend the IT Act with retrospective effect saying "it is not unusual", the UK-based Vodafone said it is consulting lawyers on the issue.

"Intention of legislation was that if you pay tax in one country then you will not have to pay tax in another. Not that you will not have to pay tax at all…Restrospectivity may not be very desirable, but it is not unusual," Mukherjee said.

Pointing out that such practice exists in countries like China and Australia, he said, "We are expressing our intention quite clearly…that this is the law of the land, this is the intention of the legislature".

Under the proposed amendment in the IT Act, to come into effect from April 1, 1962, all persons, whether resident or non-residents, having business connection in India will have to incur tax deducted at source and pay it to the government even if the transaction is executed on a foreign soil.

As the move will have implications in the Vodafone case, the company said: "We are examining this proposed decision with our lawyers, but we do not believe this retrospective change in tax law should have any impact on the final judgement handed down by the Supreme Court in our tax case."

Vodafone, which recently won the withholding tax case against the government in the Supreme Court said: "We continue to have faith in the Indian judicial system".

On the impact of the decision on foreign investment, Mukherjee said, "FDI inflow or foreign investment does not come from the point of taxation. There are other aspects also (like) size of the economy, chance of profitability, returns from investment… all those factors are also there".

Talking to reporters at the customary post-budget briefing, Revenue Secretary R S Gujral, "there are large number of similar (Vodafone type) cases which could be impacted. Our rough assessment is that total impact of such cases would have been to the tune of Rs 35,000-Rs 40,000 crore".

The position of the government, he further said, "is that the intention of the legislature on the initial stage was very clear that the transaction like the Vodafone, are subject to taxation in India.

"When the underlying assets are in India, they are subject to tax in India…The amendment is only a clarification. It is reiterating of the original intent of legislation," he said.

In the Vodafone case, the Supreme Court had held that the Income Tax department did not have the jurisdiction to levy Rs 11,000 crore as withholding tax on Vodafone for its USD 11 billion acquisition deal with Hutchison Essar in 2007.