Union Finance Minister Pranab Mukherjee, in his budget speech on Friday, proposed to amend the Income Tax Act with retrospective effect to bring under the tax net all overseas transactions involving domestic firms.
Aimed at covering “income deemed to accrue or arise in India,” the amendment says all persons, whether resident or non-resident, having business connection in India will be required to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil. The government wants the amendment to come into effect from April 1, 1962.
The move comes after the Income Tax Department lost in the Supreme Court a case of Rs. 11,000- crore tax liability against Vodafone for purchase of stake in the erstwhile Hutchinson Essar in 2007. The government has already filed a review petition.
Talking to journalists after Mr. Mukherjee's budget speech, Revenue Secretary R.S. Gujral said: “There are a large number of similar cases which could be impacted. Our rough assessment is that the total impact of such cases would have been to the tune of Rs.35,000-Rs.40,000 crore.”
The government's stand, he pointed out, was clear that transactions like the one made by Vodafone were 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. The stand of India is clear that there should not be cases of no taxation. If there are cases of double taxation, then we will be looking into the issue and resolve it.” Meanwhile, Vodafone, in a statement, said: “We are examining this proposed decision with our lawyers, but we do not believe this retrospective change in the tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system.”
