NEW DELHI: The government is considering waiving penalties on past cross-border deals that will come under the scanner of tax authorities once a contentious proposal allowing it to tax transactions retrospectively is cleared by Parliament.
The proposal will pare the tax dues of British mobile giant Vodafone Plc to about Rs 7,900 crore from Rs 20,000 crore, paving the way for a possible settlement of the five-year-old tax dispute, said an official with knowledge of the matter.
The person emphasised that no decision had been taken as opinion was divided within the finance ministry.
The nation’s top leadership will take a final decision, he said. Finance Secretary RS Gujral said there was hardly any scope for a compromise at this stage. But a senior official at the Central Board of Direct Taxes argued during internal discussions that scrapping penalties was the most pragmatic course of action, officials familiar with the matter said.
If the proposal eventually passes muster with the government’s leadership and the Budget proposal is cleared by Parliament, the tax department may issue a formal order, known as a circular, to exempt companies from paying penalty for failure to deduct capital gains tax on cross-border deals that took place before April 1, 2012.
In Vodafone’s case, the compromise involves asking the company to pay tax of about Rs 7,900 crore but sparing it from penalty of an equal amount for failure to deduct tax at source.
The proposed circular on penalty waiver is being considered as a compromise with Vodafone alone could trigger demands from companies that have been involved in similar deals and on whom tax demands have already been raised.
The prime minister and finance minister met Wednesday morning to discuss the impact of proposals in the finance bill that have caused uproar among international investors.
The two discussed the need to assuage investors, who are also upset with the government’s move to introduce a general anti-avoidance rule to curb sharp tax avoidance practices, said PMO sources. The government will take a reasonable stand and clarify that it does not intend to open up past cases or go on a witch-hunt. In his defence, the finance minister will maintain that the amendment only clarifies the actual intent of the law.
On Tuesday, Vodafone CEO Vittorio Colao and the company’s India non-executive chairman, Analjit Singh, met Finance Minister Pranab Mukherjee. Both the government and the company broadly stuck to their guns during the discussions. Vodafone is said to have proposed a compromise formula and the government is now looking at its feasibility, said the official.
A compromise settlement will ensure that the government does not retreat from the basic principle of taxing cross-border deals in which the underlying asset is in India. At the same time, it would assuage foreign investors, who are spooked over the government’s plan to charge Vodafone Plc capital gains tax with penalty and interest even after it won the $2.2-billion dispute in the Supreme Court.
However, it is not yet clear whether the government would also waive interest on delayed payment of tax, estimated at around Rs 4,000 crore.
Other deals that could come under the tax ambit include Sanofi Pasteur Holding’s acquisition of Hyderabad-based Shantha Biotechnics and Barclays’ investment in business process outsourcing company Intelenet Global Services. Stake transfers in Idea Cellular and GE Capital International Services, now known as GenpactIndia, are also being examined by the tax authorities.
Vodafone’s purchase of Hutchison’s stake in its mobile telephony venture with Essar in 2007 through sale of a holding company registered in Cayman Islands triggered an epic legal battle when the government raised a tax demand on the grounds that it had the right to charge capital gains tax as the deal involved an Indian asset. Vodafone challenged the tax demand, but lost in the Bombay High Court. It then moved the Supreme Court, which ruled in its favour.
Following the verdict, the government proposed to change the language of the tax law to make it clearer. It also proposed a validation clause that will override court decisions. The proposal has sparked off an international uproar with the UK’s Chancellor of Exchequer, George Osborne, raising the issue with Mukherjee, and global trade bodies across the US, Europe and Asia warning that foreign investment flows into the country could be impacted.
Later, Vodafone served a ‘dispute notice’ on the Centre, the first step before it begins international arbitration proceedings under the India-Netherlands bilateral investment treaty against the government’s move.
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