DTC Bill proposes to plug loopholes on foreign acquisitions

NEW DELHI: To plug the loopholes that led to the dispute between Vodafone and the Income Tax Department, the government today proposed to impose capital gains tax on acquisitions made overseas if the acquired company holds over 50 per cent assets in Indian company.

"It is strictly in the provisions of the Bill that where a transaction takes place where company owns an underlying assets which are in excess of 50 per cent Indian assets then in that case, on a proportional basis, capital gain would be chargeable," explained a Finance Ministry official after the Direct Taxes Code Bill was tabled in Parliament.

The Bill, which aims to replace the Income Tax Act from April 1, 2012, contains this provision so that no tax dispute arises from this kind of transaction, as has happened in the case of Vodafone.

Telecom major Vodafone had been disputing the claims of the Income Tax Department, saying that no tax is payable on its $ 11.1 billion deal with Hutchison in February, 2007.

In contrast, the I-T department has been claiming that it has full jurisdiction to tax Vodafone.

The dispute concerns Vodafone Group Plc's acquisition of a 67 per cent stake in Hutchison Essar from Hong Kong's Hutchison Telecommunications International Ltd.

Vodafone had paid $ 11.1 billion for a 67 per cent stake of Hutchison in Hutchison-Essar (since renamed Vodafone Essar) in 2007.

The government approved the deal in May, 2007, itself. After regulatory clearances were given, the tax department issued a showcause notice to Vodafone saying the company did not deduct tax, estimated at around $ 2 billion.

In 2007, Vodafone received a showcause notice asking it why it had not done this. Following the notice, the company approached the Bombay High Court.

After the High Court dismissed Vodafone's petition challenging the I-T department's notice, the company moved the Supreme Court in January, 2009.

The primary question that Vodafone requested the apex court to answer was whether Indian authorities have the jurisdiction to tax a transaction that occurred outside India between two global players.