Refund fears behind tax law tweak

JAYANTA ROY CHOWDHURY

New Delhi, March 18: The budget tax amendment targeting Vodafone had to be done as otherwise a large number of firms would have demanded tax refunds citing the favourable Supreme Court verdict towards the British telecom giant, finance minister Pranab Mukherjee said here today. The government would have had a full-blown financial crisis had the situation of refunds emerged. "Suppose cases are brought up which asks me to pay retrospectively taxes already collected on the basis of this Supreme Court judgement… can you imagine the kind of money I will have to pay… I can't create a financial crisis of that sort," Mukherjee said at an interaction here in his North Block office. His budget for 2012-13 proposed a clarificatory amendment to the Income Tax Act to allow the taxation of sale of Indian assets abroad with retrospective effect. The minister pointed out that a large number of similar cases since 1998 could have been reopened on account of the Supreme Court verdict. He asserted that though he believed that "retrospective legislation should not be done", this was a special case, which underlined it was not the intent of Parliament to let go of its taxing rights only because the investor chooses to create multiple structures to hide the real transaction to avoid paying taxes. In January, the Supreme Court had ruled that the government had no jurisdiction to tax Vodafone's purchase of a 67 per cent stake in a mobile firm from Hutchison Whampoa that was subsequently renamed Vodafone India, in a deal structured in the Cayman Islands. The government was asked to return Rs 11,000 crore in presumptive taxes, with a 4 per cent annual interest. "We are making three points clear. We are not a zero tax country. All taxpayers — whether domestic or foreign — will be treated on a par, we have made it clear you either pay taxes here or in your country of origin (if India has a double taxation avoidance treaty with it) and that if the government thinks it has to protect its revenue it shall do so," Mukherjee said, adding "even if someone were to say I will bring in $200 billion if there are no taxes, I will say sorry, for we are not a tax haven". "Our intention is not to reopen cases but rather to stop the outflow of money we have already collected… it is the job of every finance minister to protect the government's revenues," he stressed. "We were facing a peculiar situation where some companies or entities were planning tax in such a way so as to pay no tax at all… that cannot be the legislative intent of any tax law. What we are doing is to make the legislative intent clear," Mukherjee added. The budget amendment to Section 91(i) of the Income Tax Act "to clarify that an asset or a capital asset… in a company or entity registered outside India shall be deemed to be… situated in India if the share or interest derives, directly or indirectly, its value substantially from assets located in India", has a retrospective effect from April 1, 1962, the date when the tax law was passed by Parliament. However, Mukherjee said, "You have to note that this clarificatory amendment is limited by other provisions of the income tax which limits the revenue department from taking up cases of this sort which are more than six-years old." North Block officials said the thought that past cases could be reopened because of the Vodafone judgment had been factored in while drawing up the amendment, but the ministry had not chosen to speak of it.