Union Budget 2012: Retroactive change in tax rules to convey government's intent

The finance ministry has said the retrospective change in the income tax law allowing authorities to tax cross-border transactions in which the underlying asset is located in India is aimed at making the government’s intent clear on the issue.

“The amendment had to be brought in to clarify the government’s legislative intent,” said a ministry official. But the official said there is no move to reopen old cases. This stance is unlikely to help Vodafone because a review petition is still pending in the Supreme Court and the government does not regard the case as closed, another ministry official said.

The amendment, however, has implications not just for the Vodafone case but also other transactions that are in various stages of adjudication. Similar companies include AT&T, GE and SABMiller. The Supreme Court on January 20 allowed Vodafone’s appeal and quashed the Bombay High Court verdict which had upheld the tax authorities’ decision to levy tax on the $11 billion transaction.

Vodafone had argued that tax authorities could not impose taxes because the transaction took place in Cayman Islands and both the buyer and the seller were foreign. The deal was between Vodafone International Holdings BV, a Dutch subsidiary of the British firm, and CGP Investments, a Cayman Islands company which held the Indian telecom assets of Hutchison.

“Even if any case has escaped the eye of tax authorities it could be reopened only for the past six years,” the official said. “There has been a long history of amending the Income Tax Act with retrospective effect to overcome judicial decisions and their constitutional validity has been upheld by courts as well,” the official added.