ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Nine Years of Turmoil in Taxation

In 2012, the finance ministry of the Government of India amended the Income Tax Act to tax capital gains from indirect corporate transactions. This law was applied retrospectively, permitting the finance ministry to tax companies for similar transactions in the previous half a century and creating consternation among foreign investors. The ministry decided to dispense with this in August 2021. Despite the altered legal position that this law will apply prospectively instead of retrospectively, the woes of the ministry are not over.

 

The merger and acquisition deals in India confronted a peculiar situation in 2007. An Indian asset was held by a foreign company and when an acquirer bought this holding company, the finance ministry of the Government of India (GoI) felt that the capital gains out of this transaction are ­liable to be taxed as the asset is located in India. Accordingly, the finance mini­stry ordered Vodafone, a British telecom giant, to pay withholding tax related to its acquisition of what later became Voda­fone India from the Hutchison group. It was an indirect corporate transaction that took place in 2007. Vodafone refu­sed to pay the tax and approached the Bombay High Court, where it lost the case. Undeterred, it appealed to the ­Supreme Court of India.

In January 2012, Vodafone won the case in the Supreme Court, which ruled that Vodafone need not have to pay taxes for the acquisition. The finance ministry, having lost the litigation in the country’s top court, amended the tax laws in the central budget 2012–13 to allow it to tax similar transactions, and importantly, in a retrospective manner so that it can still tax the Vodafone transaction.1 This law received the presidential accent in May 2012, and the tax dispute with Vodafone—estimated to be $2 billion—was reope­ned. It did not end with Vodafone. The retrospective application of the law permitted the finance ministry to tax companies for similar acquisitions in the previous half a century, specifically from the date of promulgation of the Indian Income Tax Act, 1961. Indian tax autho­rities hunted and eventually opened cases aga­inst a dozen and a half corporate entities.

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Updated On : 18th Sep, 2021
Back to Top