Section 9 of the Income Tax Law has been amended retrospectively from April 1 1962. This means any Vodafone-style transaction is now under investigation by the tax authorities.
The amendment potentially means the Vodafone case could be reopened and will encourage the government in disputes involving AT&T and SABMiller.
Last month, the Tax Department asked the Supreme Court to reconsider its judgment, arguing that the country’s tax law was incorrectly interpreted.
In its petition, seen by International Tax Review, the department said, "there is a patent error apparent" in the court's findings, which holds that the deal is a "bona fide structured" foreign investment into India.
If the petition is heard before the retrospective legislation is passed, then the ruling is likely to stand. However, if it is heard post-amendment, then the decision will likely be overturned.
If the former occurs, then the government has one final card to play - a curative petition. This would allow the government to force the Supreme Court to re-open the case.
GAAR
Finance minister, Pranab Mukherjee, used today’s budget to also confirm that a general anti-avoidance rule (GAAR) will be included in this year’s Finance Bill.
The GAAR will be used to determine whether a transaction was performed for tax avoidance purposes. Despite the Chief Justice of India in Vodafone laying down six tests to establish whether tax avoidance has taken place, the GAAR expressly states that these will not be considered when applying the GAAR.
The GAAR will be effective from April 1 2012.
The GAAR provisions will be invoked with the approval of a commissioner of income tax and will be subject to further confirmation from a panel of three more commissioners.
However, questions are likely to be raised as to the constitutional validity of such an amendment.
The concern for taxpayers is that the government seems to be challenging the country’s judicial system, rather than respecting it.
Other budget highlights
The Direct Taxes Code Bill to be enacted as soon as the report from the Parliamentary Standing Committee has been examined.
Continued drafting of model legislation for the Centre and State GST.
Introduction of advance pricing agreements from July 1 2012. Further details to be released at a later date.
Extension of transfer pricing rules to domestic transactions
Definition of an international transaction under Section 92b, Income Tax Act, extended to include marketing intangibles
All taxpayers now liable for Alternative Minimum Tax
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REACTION:
Sunil Kothare, director of tax at Citibank
“The retrospective amendment is a real concern and I fully expect it to be approved. The GAAR panel is total rubbish. The panel of three commissioners will simply agree with the first commissioner. If this works as ineffective as the Dispute Resolution Panels then I expect it to be a pointless exercise.”
R Mani, head of tax, Tata
“I do not know why the government has made this amendment retrospective. They should be trying to create growth and attract investment rather than going after taxpayers. They should have just accepted the court’s decision.”
RN Dash, former director general of income tax (international tax), Government of India
“I am happy to find that the budget proposals include introduction of APAs which will bring in much required certainty in transfer pricing and will reduce litigation. The new GAAR provisions need to be tempered by appropriate guidelines to the Statutory Approving Panel to be credible.”
Pallavi Bakhru, tax leader at Walker Chandiok & Co
“The budget seemed more benign than it is. While most of the amendments were anticipated such as tinkering of personal tax rates, small exemptions for the middle income group and widening the net of service tax and taking the rate up, the fine print has wider ramifications. Retrospective amendments to address Vodafone-style situations, bringing domestic related party transactions under the ambit of transfer pricing are a case in point.”
Samir Gandhi, transfer pricing leader, Deloitte
“Introduction of APA is a very welcome step. Transfer pricing is a complex area and disputes are unavoidable but APA not only resolves disputes in fact it prevents dispute from arising. APAs will give certainty to both taxpayers and tax authorities to arrive at pricing in advance and reduce compliance and administrative burden – it will also reduce, and minimise cost of audit and litigation. We need to see if APA can be rolled back to open years.”
Amit Singhania, Amarchand & Mangaldas
“The taxability of the indirect transfers has unfolded again through retrospective amendments in the provisions codifying the source base taxation. This will significantly impact the cross-border transactions and the debate will again knock the doors of the court.”
Gagan Kumar, Archer & Angel
“These budget proposals are aimed at curbing tax evasion and increasing tax compliance by plugging all the tax loopholes that have been raised by tribunals recently. In the way the retrospective amendment to section 9 has been announced, we will wait to see if it stands the test of time. All critical provisions from the DTC have seeped into the Income Tax Act, which makes a wait for the DTC inconsequential.”
Sanjay Sanghvi, Khaitan & Co
"One is not sure how far such a [GAAR} panel will be able to function in an unbiased manner and do justice to a case before it. One will have to also wait and watch for the scheme to be prescribed by the Central Board of Direct Taxes which will set out the conditions and the manner of application of GAAR provisions. All in all, surely a set of provisions with huge scope of litigation and challenges for businesses/taxpayers as well as for tax administration to execute and implement these provisions in a rationale and reasonable manner."
