It is more than clear that the last word has not been written on the controversial Vodafone tax case. Complying with the Supreme Court ruling rejecting its review petition against its January 20 verdict, the government has had to refund Rs.2,500 crore along with four per cent interest to the British telecom major.

But that's only for now, in keeping with the existing tax laws of the land. The moment the relevant amendment contained in the Finance Bill, 2012 to plug the loopholes in the Income Tax Act is approved by Parliament, the tax demand of over Rs. 11,000 crore will get reactivated again and Vodafone will have to automatically pay the amount without even the need for a fresh notice.

The Finance Ministry believes so. For the simple reason that, if challenged again from the legal angle, the Supreme Court will have to go by the law of the land as the legislation would stand amended with retrospective effect to bring such structured deals under the tax net.

“You can only tax on the basis of existing law. We have no right to tax them, current law will prevail so long [as] law is not changed,” Law Minister Salman Khurshid said on Tuesday after a meeting with Finance Minister Pranab Mukherjee following dismissal of the Centre's review petition.

In fact, even as the proposed changes are part of the Direct Taxes Code (DTC) which is slated for implementation from 2013-14, the Finance Minister chose to make the amendment a part of his budget for 2012-13 with the objective of clarifying the legislative “intent” of I-T Act, 1961 on taxation of overseas deals involving domestic assets.

India not a tax haven

Following the apex court's verdict against the Centre raising a Rs. 11,000-crore withholding tax demand on Vodafone for its $ 11 billion acquisition deal with Hutchison-Essar in 2007, the government's primary aim is to plug the loopholes which help companies escape the tax net through aggressive tax planning.

Even as the amendment is being viewed as a regressive measure that would impact foreign direct investment (FDI), the Finance Minister and his officials have reiterated over the past few days since the budget presentation that India, which is bound by double taxation avoidance agreements (DTAAs) with scores of sovereign countries, should not be seen as a “no tax” country or “tax haven.”

According to taxation experts, the retrospective changes in the I-T Act will have a bearing on hundreds of Vodafone-type overseas deals and unless tax intent is made clear, it could lead to a “fiscal crisis,” as the Finance Minister said a few days ago. There is merit in that argument, when viewed in the larger interests of the country.

In any case, the business environment will still remain friendly, as U.S.-India Business Council (USIBC) president Ron Somers noted at a CII event in Mumbai. “Vodafone kind of cases sent a wrong signal to investors. It is a little regressive in nature. However, we believe this is one-off case and the overall business environment will remain investor-friendly,” he said.

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