Vodafone to examine Budget's tax fine print

In what is probably the ugliest detail in the budget’s fine print, the government introduced a retrospective amendment to the Income Tax Act, 1961. This move will go a long way in impacting the much needed FDI flow in the country.

After losing its case in the Vodafone-Hutchison case in the Supreme Court in January, the government has decided to fight back by bring in an amendment, which will be applicable on a retrospective basis.

The Supreme Court had rejected tax department’s claim whereby the tax department was asked to refund Rs 2,500 crore to Vodafone with an annual interest of 4 percent.

The fine print talks of an amendment which empowers the Indian tax authority to tax cross border deals. The Supreme Court in its interpretation of Section 9 of the Income Tax Act passed a judgment on the case favouring Vodafone-Hutchison in January 2012, saying that the tax department did not have powers to tax the transaction.

While analysts expected the act to be amended, no one thought that the government will do it on a retrospective basis.

“The amendment on a retrospective basis is akin to changing the rules of the game after the game is over”, says an analyst who tracked the development. Not only will this impact new FDI flows in the country, it would open up all the old ones too, he said.

Meanwhile, Vodafone has said they will look at the fine print of the Budget in details due to the retrospective amendment in tax provisions. They are examining the new provisions with their lawyers. They claim the new tax provision does not apply to their case. However, the company says they “continue to have faith in the Indian judicial system.”

This is perhaps a hint that the company will not rule out a legal challenge to the provision, if it affects them.

On 20 January, after extensive hearings from August to October last year, the Supreme Court rejected the tax department’s claim of jurisdiction over a share transfer carried out overseas, under which Vodafone was served a notice to pay withholding tax ofRs.11,218 crore.

Similar cases which are pending before various courts, or other appellate authorities, include those of Cairn UK Holding Ltd, Unilever HPC Finance Service Inc USA, Accenture Services Pvt Ltd, Euro Pacific Security Ltd, Tata Industries Ltd and AT&T, Mcleod Russel India, SAB Miller (A&A), Sanofi Pasteur Holding SA would be affected by the Vodafone judgment.