Even as the Supreme Court ruling on the Vodafone case has come as a major revenue setback at a time when tax collections are falling short of budgeted targets owing to slowdown, the government is unlikely to go in for a review of the judgment as a salvage operation measure.
For the Income Tax Department, the apex court judgment setting aside the Bombay High Court order and quashing the Rs. 11,000-crore tax demand on Vodafone could not have come at a worse time, especially when the Finance Ministry is grappling with problems of low-revenue collections and higher-than-budgeted subsidy spending, leading to a high fiscal deficit in the wake of a dismal disinvestment mop-up.
In the event, while India Inc. and various chambers have lauded the Supreme Court ruling upholding the law which will send positive signals to foreign investors and be beneficial for foreign direct investment (FDI) in the long run, there are apprehensions in certain quarters that the government may end up doing something as drastic as amending the law with retrospective effect to achieve short-term gains at the expense of the long-term.
Fearing the likelihood of such myopic action by the government, apex chamber Federation of Indian Chambers of Commerce and Industry (FICCI) has warned against any knee-jerk step as a change in law in this regard would hurt foreign investments in the long run. Speaking to PTI on the issue, FICCI president R.V. Kanoria said: “I just hope that it [court verdict] will not lead to any kind of law [by the government] which will hurt foreign investment...the government [might] just overreact to this judgment…The government's current fiscal situation is such and they have so much of constraints on revenues. This entire psychology that revenues might [get affected] might lead to such kind of decisions.”
Not misplaced
Such apprehensions are not misplaced. For, the government not only stands to lose out on Rs. 11,000 crore from Vodafone International Holdings as income tax on acquisition of overseas interests in Hutchinson-Essar Limited in 2007, it also has to pay back Rs. 2,500 crore received from the telecom major with four per cent interest. Moreover, the fallout of the ruling is larger as a number of multinationals operating in various sectors such as SABMiller (breweries), Sanofi Aventis (drugs), Kraft Food and Vedanta (oil) have entered into acquisition deals similar to that of Vodafone.
However, in line with the view expressed by taxation experts, the government appears to have taken the apex court's judgment in its stride. Instead of seeking a review of the ruling, the Central Board of Direct Taxes has set up a 10-member core committee for an in-depth study of the Vodafone case judgment. The exercise, ostensibly, is to pick out and plug the loopholes in the existing law that has led to the Supreme Court ruling against the revenue authorities.
As per tax laws
According to experts, the apex court's order is in keeping with the country's prevailing tax laws and upholding the rule of law has resulted in sending highly positive signals to all existing and prospective foreign investors. And therefore, any effort to tinker with the regulations would be counter-productive in the long term.
In any case, the proposed Direct Taxes Code (DTC) Bill, which is under scrutiny of the Parliamentary Standing Committee on Finance, does provide for general anti-avoidance rules with a provision for tax acquisition deals of this nature in future, as and when the archaic Income Tax Act, 1961 is replaced by a new taxation regime.
According to the provision included in Chapter XI of the draft DTC Bill, any transaction through overseas transfer of shares will be liable to tax if the underlying value in India is more than 50 per cent. Evidently, the core committee's task is to examine whether the provisions proposed in the DTC Bill are good enough from the legal standpoint to ensure that tax demands in similar Vodafone-type acquisition deals in future do not fall through.
