From: CA RAJU SHAH <shahmars@hotmail.com>
Date: Fri, Jan 27, 2012 at 11:20 AM
22 January 2012
Offshore Comes Closer Home
What the Vodafone tax ruling means for business & taxmen
:: NC Hegde
The Vodafone tax case, on which the Supreme Court pronounced its longawaited judgement on Friday, is exceptional. No Indian tax case has engendered so much passion and debate amongst tax professionals across the world. This is the first Indian tax case that was so keenly followed by international business and investor community.
However, the argument that this case was to be a measure of India's business climate was always incorrect. One has only to look to the circular issued by Chinese authorities to tax similar transfers to see why the Vodafone case wasn't an exception. The Supreme Court of course held that no tax was payable for a transaction between two non-residents involving sale of shares of a foreign company. India's taxmen had argued that it was necessary to look through the provisions of the statute. Because in substance there was a transfer of Indian assets and therefore it was a taxable transaction. The Supreme Court did not accept this, ruling that the structure used to invest in India was bona fide and of a long standing and could not be disregarded.
This judgement could have far reaching implications. Certain key takeaways are:
For Dealmakers
There are offshore M&A deals like Vodafone's that have come under the scanner of the tax department. The tax claims that are in courts will certainly be viewed in the light of the Vodafone ruling. What if the Direct Tax Code (DTC) introduces taxation of indirect transfers, as has been reported? In that case, too, investors will clearly factor in the tax cost. There will be less uncertainty.
For Mauritius Route
The ruling upholds the right of a nonresident investor to use the Mauritius route — if the transaction is genuine, the court has said, the court cannot go behind it to find some supposed underlying substance. This should give some degree of comfort to the foreign investor. But DTC may reduce that comfort.
For Tax Planners
The judgement blesses the right of the tax payer to take advantage of legitimate means of tax planning within the framework of law. It distinguishes between a genuine business transaction and one arranged in with the sole objective of taking advantage of loopholes in law. A holding structure for a business transaction can be challenged if, for example, it is used for circular trading or round tripping or to paying bribes, etc. Then, such transactions, though having a legal form, should not be viewed as genuine for the purposes of revenue collection.
These ground rules would give reasonable comfort to the global investor. Genuine business transactions will perhaps not be challenged unnecessarily.
For Non-resident Business
The court has implicitly confirmed the obligation of a non-resident to check whether the recipient of payments has tax liabilities in India, even if the recipient is also a non-resident. Though the minority judgement expresses a different view on this finding, the stand of the tax department has been vindicated. So, for this limited purpose the extra-territorial jurisdiction of Indian Income Tax Act has been confirmed.
Therefore, there is a huge onus on nonresidents to examine the Indian taxability of a non-resident recipient. The key point here is the one made by the court: if the transaction does not give rise to any taxable income in India, there's no tax obligation. But if there's taxable income, the fact that two non-residents are involved in a transaction does not mean no taxed need be paid.
For Policymaking
The court has made a plea to the government to adopt policies that provide for certainty and clarity. With the government already having incorporated some of these suggestions in DTC provisions, there is no doubt that the Indian tax system will increasingly mirror those of the Western world.
The writer is Partner, Deloitte Haskins & Sells. Views are personal
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