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Direct Tax Code will net Vodafone-like overseas deals
January, 21st 2012

The proposed rollout of the Direct Taxes Code (DTC), a key tax reform that is in the offing, specifically provides for the imposition of capital gains tax on overseas acquisitions if the acquired company holds over 50 per cent assets in India. This provision will ensure that such transactions fall under the tax net once the DTC is enacted. So, Vodafone may have ended up paying tax on the $11.1 billion purchase of Hutchisons stake in the Indian telecom venture.

The Direct Taxes Code Bill 2010 proposes to implement the general anti-avoidance rule (GAAR) for the first time in the context of a domestic legislation. GAAR refer to provisions that can invalidate an arrangement entered into by a taxpayer for claiming tax benefits. It is expected to sufficiently empower the authorities to determine tax consequences for any arrangement that is deemed a tax avoidance transaction.

Under the proposed rules, transactions where a company owns an underlying asset in which the Indian assets are in excess of 50 per cent, the capital gain is to be correspondingly charged on a proportional basis.

The provision essentially implies that if 70 per cent of an acquired foreign companys assets are in India, the acquirer will have to pay 70 per cent of the capital gains tax accruing from the transaction.

Before the matter was conclusively settled by Fridays apex court ruling, Vodafone had disputed the Income Tax Departments notice by claiming that no tax was payable on its deal with Hutchison since the shares that changed hands rested in Cayman Islands.

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