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Budget 2012 may include DTC norms to avoid Vodafone-like disputes
January, 27th 2012

To avoid disputes like the Vodafone tax case in future, government is contemplating incorporation of provisions on taxation of overseas deals from the stalled Direct Taxes Code (DTC) Bill in the Budget for 2012-13.

"The Direct Taxes Code Bill contains a proposal to tax similar transactions... We are planning to include that provision in the Finance Bill so that in future, such issues do not arise," a top Finance Ministry official said.

In a judgement that will have revenue implications of about Rs 11,000 crore, the Supreme Court last week set aside the Bombay High Court's decision in favour of the Income Tax Department on the Rs 11,000 crore tax demand on Vodafone International Holdings following its overseas acquisition of interest in Hutchinson-Essar Limited in 2007.

The apex court had also asked the I-T Department to return Rs 2,500 crore deposited by Vodafone International Holdings within two months, along with 4 per cent interest.

In view of the judgement, the Essar Group is reportedly contemplating a refund of the $883 million deducted as withholding tax by the I-T Department on the 22 per cent stake sale by its Mauritius entities in Vodafone Essar.

The Supreme Court decision will have implications on similar cross-border deals where companies have not paid capital gains tax and will also impact future transactions.

Chapter XI of the draft DTC Bill, which is currently under consideration of a Parliamentary Standing Committee, provides for general anti-avoidance rules.

"According to the (DTC) provision, if there is an overseas transfer of shares with an underlying value in India of more than 50 per cent, it is liable to be taxed," KPMG Deputy CEO and Chairman Tax Dinesh Kanabar said.

Sources said the chances of the code coming into effect from next fiscal also appear unlikely as the parliamentary committee is yet to submit its report.

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