Finance Minister Pranab Mukherjee maintained on Sunday that the budgetary proposal to amend the Income Tax Act with retrospective effect from 1962 to assert the government's right to levy tax on merger and acquisition (M&A) deals involving overseas companies with business assets in India is not Vodafone “case specific,” but an enabling provision to protect the fiscal interests of the country and avert the chances of a crisis.
Faced with all-round criticism at home and abroad of the move to amend the relevant legal provision with the objective of bringing the Vodafone case under the ambit of tax through the back door after it lost the litigation in the Supreme Court, the government has gone on a fire-fighting mode to explain its stand and legal position.
In his post-budget interaction with the print media here, while conceding that retrospective amendments should not normally be brought in, Mr. Mukherjee asserted that the changes being sought are not Vodafone-specific. In fact, it was not merely to prevent the erosion of revenues in present cases, but also to prevent the outgo of revenues in old cases.
“Retrospective fiscal legislation normally should not be brought in. But if a judgment comes that Rs. 5 lakh crore in revenue has to be returned, would it be possible?… Everybody knows that it will lead to a financial crisis,” he said.
“We are making three points quite clear — that India is a not a ‘no tax' or ‘low tax' or even a ‘tax haven.' India is a country where all taxpayers, whether resident or non-resident, will be treated on a par. Secondly, India is a country where tax laws are that if you pay tax in one country, you need not pay tax in the other country of your business operation which is covered by the DTAA. But it cannot be a case that you pay no tax at all.”
Explaining the circumstances under which the amendment had become necessary, he said some companies or entities may do their tax planning in such a way that they don't have to pay tax at all. Had the case been that they had to pay tax in one country and pay tax in another country as well, it would have been a case of double taxation and we would have dealt with it accordingly.
“Why we have to go back to day one is that this is one piece of legislation which is relevant to the date of enactment. Because I am amending the Income Tax Act 1961, Section 90, its relevant date is the date of enactment of the Act and that is why it goes back to 1962.”
Mr. Mukherjee said the intention was clear: where assets are created in one country, it will have to be taxed by that country unless it is covered by the DTAA.
Does that mean that all cases of a similar nature from 1962 come into the ambit of tax? “No. Because, other provisions of the I-T Act are there which says that you cannot reopen any case beyond six years,” he said.
Mr. Mukherjee also pointed out that some confusion had been created owing to another amendment which pertained to reopening assessment up to 16 years. But that, he said, was only for “resident” taxpayers who had unaccounted or unauthorised income or assets abroad.
To a pointed question whether the amendment had been proposed to get back the Rs.11,000 crore as tax from Vodafone, Mr. Mukherjee said: “Unless the review petition is disposed of, this matter is sub-judice. I am not talking of the case of Vodafone or X or Y or Z. Every Finance Minister will have to protect the interest of the country from the revenue point of view. It is not for reopening the cases, but protecting the government's interests from the revenue angle.”
Alongside, in a note circulated by the Finance Ministry, the government sought to argue that the decision to amend the I-T Act with retrospective effect would not impact foreign investment flows.
“The apprehension that the retrospective amendments would create negative sentiment for FDI is not correct. FDI comes when there is profitability. FDI does not come only on account of zero tax… To make the intent of the legislature clear, clarificatory amendments have been proposed. This will bring tax certainty and would also make it clear that India has a right to tax similar transactions.” It did not mean that the government would start re-examining tax cases from 1962 onwards.
In effect, since the Vodafone transaction was not taxed in either of the countries, it was susceptible to 10 per cent tax in India.