Govt may agree with Shome panel on retro tax

The government is likely to give telecom major Vodafone a breather in the Rs 11,000-crore (Rs 110-billion) retrospective taxation case involving the British firm by accepting the recommendations of the Parthasarathi Shome panel.

After accepting, with some modification, most of the committee’s recommendations on the General Anti-Avoidance Rules, the government appears set to also accept its suggestions on the application of retrospective taxation clauses introduced in the Income Tax Act through the Finance Act, 2012.

The issue is significant as Finance Minister P Chidambaram, in the last leg of his tour of global financial centres to address foreign investors’ concerns, would be in London on Tuesday.

There, he is likely to indicate the government’s thinking on retrospective taxation.

The Shome committee had in its first report advised the government against the implementation of tax rule changes retrospectively.

It had favoured prospective taxation.

It had also suggested that retrospective taxation be done in the rarest of rare cases and levied on an entity that had made capital gains.

The panel had also suggested a waiver of penalty and interest in such cases.

The panel’s final report, given in November, is awaiting the finance ministry’s approval. Prime minister Manmohan Singh had set up the committee to look at GAAR.

Its mandate was later extended to include retrospective taxation as investor sentiments worsened following the two proposals in Budget 2012-13.

The government’s

decision on the Shome panel recommendations would have a direct impact on the tax case involving Vodafone.

The Income Tax department had originally raised a demand of Rs 7,900 crore (Rs 79 billion) on Vodafone over its acquisition of Hutchinson’s stake in Hutch-Essar through a 2007 deal in the Cayman Islands.

With interest and penalty, the demand could go up to Rs 20,000 crore (Rs 200 billion). After the Supreme Court ruled against the government’s tax demand on Vodafone last year, the retrospective tax changes were made in the Budget to tackle such cases.

Sources in the know said though the Vodafone case was still in the Supreme Court, as the government had asked for a review, the government could go ahead and take its call on laws for retrospective taxation.

The government’s move on the legal front in the Vodafone case and on the changes in law could go on simultaneously, said a senior finance ministry official.

He added that the basic principle of retrospective taxation was likely to be framed according to the panel’s recommendations and the government would then, in line with these norms, look at a solution to the Vodafone tax issue.

Tax experts indicate, if the recommendations are accepted, the Income Tax department would look at collecting the tax from Hutch, which made capital gains on the deal, rather than asking for withholding tax from Vodafone.

A senior income-tax official said the I-T department would be able to collect taxes on the deal without going out of the bounds of Shome committee recommendations, if the government decided to do so.