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India To Tax More Merger Deals

by Lorys Charalambous,, Cyprus

04 June 2012

The Indian government has a list of corporate merger deals from which it hopes to claw back billions of dollars in back taxes with a proposed retrospective amendment to income tax law.

An Indian government official told reporters recently that the government has set its sights on up to 20 M&A deals which share similar characteristics to Vodafone's takeover of Hutchinson Essar's Indian business, and which erupted into a five year fight between the British telecoms giant and the Indian tax authorities.

The official indicated that under the new legislation, about INR400bn (USD7bn) in additional revenues could be raised from these deals.

The controversial proposal to amend the Income Tax Act was announced by Finance Minister Pranab Mukherjee in the 2012 Union Budget in response to the Supreme Court's backing of Vodafone.

In January, the Supreme Court ruled that the company was not liable for a USD2.2bn bill in back taxes and penalties in connection with its acquisition of a majority stake in mobile phone company Hutchinson Essar in 2007. The government was also ordered to repay the USD496m deposit paid by Vodafone in late 2010, plus 4% interest.

In the Vodafone case, the tax authorities took issue with the way that this transaction was structured, which involved Vodafone International Holdings, a Dutch-registered subsidiary of Vodafone Group, making the USD11bn payment to a Cayman Islands-registered subsidiary of HTIL, in order to acquire a 67% stake in Hutchinson Essar.

In a bid to catch such transactions - a major route for foreign investment into India - in the Indian tax net, Finance Bill 2012 clarifies that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

The government has decided to backdate this amendment to 1962 when the current income tax legislation was introduced. However, business groups in India fear that such a drastic move could backfire on the government because it would seriously damage India's reputation as a stable and predictable place to do business.

TAGS: tax | business | holding company | India | law | mergers and acquisitions (M&A) | offshore | controlled foreign corporations (CFC) | legislation | triangulation

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