From The Hindu Business Line

The Government must spare no effort to bring to a close its dispute with Vodafone over whether the latter was guilty of not deducting tax at source on the profits accruing to Hutchison when Vodafone took a controlling interest in Hutchison Telecom International Ltd’s assets in India. The decision of the Supreme Court on the case leaves it with no other option. At stake was the question whether the sale by Hutchison, of a solitary share in a Cayman Islands company, fastened on it, a tax liability under Indian law, even though the transaction involved an asset situated outside India’s borders; By extension, whether Vodafone was guilty of not deducting the tax at source on the income accruing to Hutchison. The Supreme Court had held that the law as it existed at the time when the transaction took place, recognised a ‘capital gain’ on a notional basis, only in the case of transfers taking place outside India but involving assets that are themselves situated within. In this case, the asset in question — a solitary ‘share’ in a Dutch company was clearly located outside India. The fact that it derived its value from certain underlying telecom assets located within India is immaterial as the law did not contemplate bringing to tax even cases of indirect transfers of Indian assets.

True, Parliament has since amended the law and with retrospective effect to plug that loophole. But the legal effect of the Supreme Court judgement upholding Vodafone’s contention is that it was not obliged to deduct tax at the time it paid the sale consideration to Hutchison. The retrospective amendment nullifying the effect of the Court’s judgement can only create a liability on Hutchison to pay tax on the profits it earned on sale of its telecom assets in India. But it cannot, on any reasonable interpretation, impose on Vodafone, the stigma of breach of any Indian tax law on deduction of tax at source. The effect of purchase consideration paid in full by Vodafone and since sanctified by the Supreme Court as legally valid and proper cannot be undone by retrospective legislation. While tax may be a continuing obligation a transaction of cash payout cannot be resurrected after it is completed. Hence, the retrospective amendment of the law on income ‘deemed to accrue’ from indirect transfers of Indian capital assets does nothing to impose a legal obligation of deduction of tax at source.

A compromise settlement with Vodafone would establish to the outside world the principle that a tax is legitimately payable on income that accrued from transfer of overseas assets with an Indian connection. It also enhances India’s reputation as a place where law is enforced in a fair and transparent manner. Such an outcome may well be the ‘real’ capital gain for the Indian economy.

For more on this story go to:

http://www.thehindubusinessline.com/opinion/editorial/cabinet-plan/article4743332.ece