India's income tax department today said it would scrutinise more than a dozen cases of offshore mergers and acquisitions in which the deal results in an ultimate change of ownership of Indian firms.
The latest move by the tax department comes in the background of a favourable ruling from the Bombay High Court yesterday in a case filed by Vodafone International Holding BV.
"The high court's decision has strengthened the hands of the income tax department in its attempt to bring to tax in India transactions involving transfer of assets situated in India between entities located outside the country," the Central Board of Direct Taxes Chairman NB Singh told reporters here.
"This was a test case. There may be other similar cases that may have escaped scrutiny," added Director General of International Tax, CBDT, Prakash Chandra. We will now be issuing notices on over a dozen cases," he said.
The department did not disclose which deals are under scrutiny. But if the tax department succeeds in its efforts to tax such overseas transaction involving Indian assets, it stands to gain substantial payment of tax along with penalty and penal interest. (Recent offshore M&A deals of India-registered companies are listed in the table on Page 7, though it is not certain whether these face similar tax issues.)
Vodafone, the world's largest wireless service provider, picked up controlling stake in Hutchison Essar Ltd, India's third largest mobile service provider, by acquiring a company in 2007 that is registered in Cayman Islands, a known tax haven.
Vodafone contended that the transactions relate to two overseas entities and thus not liable to tax in India. But the tax department rejected the contention and sent out a show cause notice saying the overseas transaction relate to assets in India. Thereafter, Vodafone moved the Bombay High Court to reject the department's notice.
The department is aiming to collect over $2 billion (around Rs 10,000 crore or Rs 100 billion) from Vodafone by way of tax deducted at source on the $11.2 billion it paid to Hong Kong's Hutchison International.
Meanwhile, with the Bombay High Court giving Vodafone eight weeks time for Vodafone to file an appeal in Supreme Court, the department will move a caveat in Supreme Court seeking a hearing before giving any further stay in the case. This is important for the department to proceed with the case and other similar cases.
A tax expert said the development may have a negative impact on foreign investment. "For a foreign investor India seems to be a very tax-challenging environment. The ruling will obviously have negative impact on similar cases and future investments on Indian assets," said an income tax expert.