Business Economics & Services Team (BEST)
Better Late Than Never-A Critique on Possible Relief to Shell & Voda
The statement of the Attorney General of India, that the Government is unlikely to approach the Supreme Court against the Bombay High Court decision, which has laid down some clarity on the tax on assets that are transferred is welcomed widely both in India and abroad. Many term this decision, if followed up in letter and spirit, can be a major incentive for attracting foreign direct investment (FDI). The benefits of this decision will flow to many other multinational corporations like IBM, Nokia etc.
The pertinent point is whether the public is sufficiently aware of the merits and demerits of the case. I suspect not many including some of the correspondents covering the subject are aware of the implications of the case.
To put the issue in perspective, it is important to keep in mind three developments. One, the recent judgement of the Bombay High Court, which ruled in the Shell case that the transfer of shares of Indian wing of Shell to another group company abroad did not amount to transfer of capital assets and did not attract tax. In another case, that is Vodofone, the Bombay High Court in 2008 held that a similar transaction was one of transfer of capital assets situated in India and hence Indian tax authorities has the jurisdiction to levy tax.
Subsequently, aggrieved by the decision, Vodofone went in appeal to the Supreme Court. The apex court held that the transaction between Vodofone and Hutch was a share transfer and not a transfer of capital assets. To ensure brevity, the reasoning of the Supreme Court is not reproduced here. The court has made a legal distinction between a company and its shareholders. The judgement also did not make a distinction between the shareholding that constituted a controlling interest and shares that are purely financial investment. The court laid stress on the legal identity of the company and held that once the shareholders of the company have a legal identity distinct from the company, no matter what the proportion of the shares they hold, it follows that the two companies would have distinct identities even if one held a controlling share in the other. It emphasizes that even a subsidiary has an identity that is distinct from its parent holding company.
The second important point is that the tax authorities should not ask (look through) whether the transaction is a tax avoidance method, but apply the "look at" test to ascertain its legal nature. Going behind the "corporate veil" or looking through would be legitimate only in cases where it can be established that there is a deliberate intention of evading taxes.
However, the Indian government feels that if an Indian company conducts a financial transaction, the government should get its tax. In 2012, India changed its Income Tax Act retrospectively and made accountable for companies in similar situations to pay taxes and confirmed that Vodofoe will have to pay taxes to the tune of US$ 3.3 billion. (Esteemed readers are advised to refer the Court judgments to have a clear idea about the intent of the judgements)
A few points that have to be considered in this cae are the following:
1. Since the opinions of the jurists, legal experts, policy makers etc. are sharply divided in this case, should we have a more informed debate on this issue before taking a decision. The finance minister has announced that that an empowered committee was set up to look into the issue of retrospective tax in the last Budget. The public should be informed as to what stage are the deliberations of the committee and when will it come out with the report.
2. Foreign investors make up their decision to invest in a country based on many factors. One among them is the certainty and continuity of tax, rules, legislation etc. since they can plan it well in advance and make arrangements accordingly. The government coming out with a clear legislation in this regard will augur well and it should fact in what are the tax provisions for similar situations in foreign countries. This will obviate delayed litigation and the so called policy paralysis.
3. The legislative pieces governing tranafer pricing should be referred to the law commission to look into the complex issues that have been addressed in the judgements such as look in and look through, distinction between money investment coming from clean sources as against tax havens. In the said case of Vodofone investment has come through Canyon Islands, a tax haven. Significantly, transfer price issues have come up in India in the recent times, ever since mergers and acquisitions have become frequent happenings. Our legislation in this regard is at a nascent stage. We have to have more clarity since it is going to be a regualr feature in our economic landscape.
4. Also, the judgement has to be seen in perspective of many such mergers and acquisitions in the pipeline. Some of the companies, after such mergers or acquisitions will emerge stronger cornering a sizable market share, defeating the very purpose of competition laws.
5. Similarly, an empowered body can decide doing away with retrospective tax, which by the very import of the word in uncertain and unpredictable. In this regard, it is better to give amnesty to the past cases by imposing fines decided by both government and parties rather than allowing such cases to drift in the court.
For More Information Pl contact:jthac1234@yahoo.com,jthac1234@google.com
Better Late Than Never-A Critique on Possible Relief to Shell & Voda
The statement of the Attorney General of India, that the Government is unlikely to approach the Supreme Court against the Bombay High Court decision, which has laid down some clarity on the tax on assets that are transferred is welcomed widely both in India and abroad. Many term this decision, if followed up in letter and spirit, can be a major incentive for attracting foreign direct investment (FDI). The benefits of this decision will flow to many other multinational corporations like IBM, Nokia etc.
The pertinent point is whether the public is sufficiently aware of the merits and demerits of the case. I suspect not many including some of the correspondents covering the subject are aware of the implications of the case.
To put the issue in perspective, it is important to keep in mind three developments. One, the recent judgement of the Bombay High Court, which ruled in the Shell case that the transfer of shares of Indian wing of Shell to another group company abroad did not amount to transfer of capital assets and did not attract tax. In another case, that is Vodofone, the Bombay High Court in 2008 held that a similar transaction was one of transfer of capital assets situated in India and hence Indian tax authorities has the jurisdiction to levy tax.
Subsequently, aggrieved by the decision, Vodofone went in appeal to the Supreme Court. The apex court held that the transaction between Vodofone and Hutch was a share transfer and not a transfer of capital assets. To ensure brevity, the reasoning of the Supreme Court is not reproduced here. The court has made a legal distinction between a company and its shareholders. The judgement also did not make a distinction between the shareholding that constituted a controlling interest and shares that are purely financial investment. The court laid stress on the legal identity of the company and held that once the shareholders of the company have a legal identity distinct from the company, no matter what the proportion of the shares they hold, it follows that the two companies would have distinct identities even if one held a controlling share in the other. It emphasizes that even a subsidiary has an identity that is distinct from its parent holding company.
The second important point is that the tax authorities should not ask (look through) whether the transaction is a tax avoidance method, but apply the "look at" test to ascertain its legal nature. Going behind the "corporate veil" or looking through would be legitimate only in cases where it can be established that there is a deliberate intention of evading taxes.
However, the Indian government feels that if an Indian company conducts a financial transaction, the government should get its tax. In 2012, India changed its Income Tax Act retrospectively and made accountable for companies in similar situations to pay taxes and confirmed that Vodofoe will have to pay taxes to the tune of US$ 3.3 billion. (Esteemed readers are advised to refer the Court judgments to have a clear idea about the intent of the judgements)
A few points that have to be considered in this cae are the following:
1. Since the opinions of the jurists, legal experts, policy makers etc. are sharply divided in this case, should we have a more informed debate on this issue before taking a decision. The finance minister has announced that that an empowered committee was set up to look into the issue of retrospective tax in the last Budget. The public should be informed as to what stage are the deliberations of the committee and when will it come out with the report.
2. Foreign investors make up their decision to invest in a country based on many factors. One among them is the certainty and continuity of tax, rules, legislation etc. since they can plan it well in advance and make arrangements accordingly. The government coming out with a clear legislation in this regard will augur well and it should fact in what are the tax provisions for similar situations in foreign countries. This will obviate delayed litigation and the so called policy paralysis.
3. The legislative pieces governing tranafer pricing should be referred to the law commission to look into the complex issues that have been addressed in the judgements such as look in and look through, distinction between money investment coming from clean sources as against tax havens. In the said case of Vodofone investment has come through Canyon Islands, a tax haven. Significantly, transfer price issues have come up in India in the recent times, ever since mergers and acquisitions have become frequent happenings. Our legislation in this regard is at a nascent stage. We have to have more clarity since it is going to be a regualr feature in our economic landscape.
4. Also, the judgement has to be seen in perspective of many such mergers and acquisitions in the pipeline. Some of the companies, after such mergers or acquisitions will emerge stronger cornering a sizable market share, defeating the very purpose of competition laws.
5. Similarly, an empowered body can decide doing away with retrospective tax, which by the very import of the word in uncertain and unpredictable. In this regard, it is better to give amnesty to the past cases by imposing fines decided by both government and parties rather than allowing such cases to drift in the court.
For More Information Pl contact:jthac1234@yahoo.com,jthac1234@google.com
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