India wants tax pact with China to cover Hong Kong

The Income-Tax department is seeking the assistance of the Chinese authorities in collecting tax from Hutch for the $11.1-billion Vodafone deal. The I-T department wants tax pact with China to be extended to cover Hong Kong too so that the $1.7-billion tax demand can be pursued further.

The move is in addition to the engagement with Vodafone, which was served with a showcause notice after the Supreme Court allowed income-tax authorities to pursue the demand. The move also comes close on the heels of a provision made in the budget to conclude tax pacts with non-sovereign entities like Hong Kong.

���HTIL (Hutchison Telecommunications International Ltd) so far has been able to get out of the tax net on grounds that the sale is not taxable in India. Now that we are allowed to sign taxation treaty with non-sovereign entities, we are pursuing a tax pact with China to cover Hong Kong too,��� said a senior finance ministry official, who did not wish to be named. HTIL is a Hong Kong-based company and sold its 52% stake held through Cayman Island-based CGP Investments Holdings.

The government may also seek assistance from the ministry of external affairs to allay any political misgivings which may arise during the negotiations. In the 2009 budget, the government has made new provisions to ink tax pacts with non-sovereign entities too.

The provision will help in the Hutch-Vodafone case since India does not have a tax treaty with Hong Kong. Though Hong Kong is now controlled by China, the earlier tax provisions continue to prevail and there is no scope for Indian tax authorities to mount pressure on Hutch unless the Chinese tax authorities lend support.

Earlier in January this year, the Supreme Court declined to intervene in Vodafone tax plea, and said in its verdict that the question of jurisdiction of the authorities to assess the tax related to contracts between foreign entities could be raised before the tax authorities. If the company was dissatisfied with the order of the authorities, it could approach the high court again, the appellate court observed.

The I-T department is already in touch with Vodafone after issuing showcause notices for not deducting tax at source (TDS) before paying Hutch and now wants HTIL also in loop.

���There is no capital gains tax in Hong Kong and HTIL has managed to evade taxes in India as well. We���re sure with the signing of a taxation treaty with Hong Kong, we���ll be able to put pressure on Hutch to pay the due amount,��� the finance ministry official said.

HTIL in its annual report with the Securities and Exchange Commission (SEC) has already filed that there may be possible tax and other obligatory payments in connection with the deal.