Vodafone-IT Dept case to come up for hearing today

The Income Tax Department has slapped a two billion dollar capital gains tax on Vodafone for its acquisition of Hutchison Essar. The matter will come up before the Bombay High Court today.

This Budget gave the tax department a boost to enhance its claim. The Finance Act, 2008 has amended Section 201 of the Income Tax Act - an amendment that now allows the tax department to claim a punitive interest rate on a defaulting assessee with retrospective effect. So if the tax department is able to claim taxability of the Vodafone - Hutch transaction, it will now also be able to claim a 12% interest rate per annum on that tax as penalty. The idea of retrospective amendments has always been a bone of contention.

Sudhir Kapadia, Head- Tax & Regulatory Services, KPMG said, “I have a view that the retrospective amendment to the law again should be made only in those circumstances where the belief is there that something has gone terribly wrong in terms of a judgement or a stand taken by a taxpayer. What we've seen unfortunately is a trend where the retrospective amendment has virtually whenever there is a case law against the revenue.”

Right now, Vodafone has approached the Bombay High Court to have the tax authorities' show cause notice quashed. But a mere quashing does not mean Vodafone is home free. Unless the Bombay High Court goes into the merits of the case and determines the taxability of the transaction - this is not the final chapter.

Akhil Hirani, Managing Partner - Majmudar & Co, said, “The larger dispute is whether there is capital gains tax payable on this transaction or not. Vodafone is seeking a limited position or view on withholding tax liability on capital gains tax, so even if this is quashed, be it on Bombay HC or SC level, the taxman is free to stake it's claim on the actual taxability of the transaction.”

With global markets opening up, tax hounds all over the world are sniffing around for their pound of flesh. The Bombay high court's ruling will set an important precedent for M&A taxability in India. It will also answer a vital question: when non-residents approach a transaction in India, do they have assurity of tax law?