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The Big Picture – Vodafone decision: Will it trigger investments?

Summary:

The union cabinet has decided not to challenge the Bombay High Court Judgement which had absolved Vodafone of any tax liability worth Rupees 3200 crore demanded by the Income Tax department. This decision taken in tune with the suggestion made by the Attorney General of India goes against the decision taken by the UPA government which had brought in an amendment to the Act to facilitate retrospective taxation. The decision taken by the UPA government had been seen as having affected foreign investments in India. The NDA government is not in favour of retrospective taxation.

Business community has welcomed the decision. They also say that such retrospective moves could result into the closure of smaller companies. It is being felt that the air now is cleared for greater investments in the country. The laws look predictable now. It is very much important for a country to have predictable and stable tax regime. There are half a dozen similar pending cases.

The High Court in its October, 2014 order had given a big relief to the UK-based mobile service provider by ruling that it is not liable to pay an income tax demand of Rs 3,200 crore in a case relating to transfer pricing. The High Court had said “in our opinion there is no taxable income on share premium received on the issue of shares.”

The Tax Department had sent Vodafone a Rs 3200 crore tax bill for allegedly undervaluing the shares Vodafone issued to its parent company. The Tax Department said that this difference in valuation was in fact a disguised loan subject to transfer pricing provisions. Vodafone argued that share premium is a capital receipt; not income and hence not taxable.

The Supreme Court in McDonald’s case had observed that the courts must make every effort to defeat any attempt to evade taxes or to avoid payment of taxes. It is also desirable that the government shall not allow loss of tax revenue in the country merely because it is going to help foreign investments.

This case is related to transfer pricing regime. Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. Transfer pricing happens whenever two companies that are part of the same multinational group trade with each other. It is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure a fair price — one that would have been charged to an unrelated party — is levied.

Another important decision was also taken by the government. The government has clarified that it will abide by the decisions taken by the Income tax tribunal and the dispute resolution mechanism which is setup by the government.

Some section of people are criticising the government’s move. They say that the decision should be taken based on the merits and not on how it will affect the foreign investments in the country.