Even as the $2 billion (Rs.10,500 crore today) tax spat between Vodafone Group Plc and the Indian government is yet to be settled, companies based in Mumbai have been playing it safe by voluntarily deducting tax at source on their international transactions.

The international taxation wing of the income-tax (I-T) office in Mumbai saw a 96% jump in TDS (tax deducted at source) collections on cross-border payments in fiscal 2011-12 (FY12)from Rs.4,637 crore in FY11 to Rs.9,067 crore in FY12, according to three senior I-T department officials who declined to be named as the data is yet to be made public.

A cross-border payment is any money (interest, capital gains, royalty, income arising in India) payable to a non-resident individual or company.

In 2011-12, we saw a 96% growth in TDS collections from cross-border payments under section 195 of the I-T Act. It is nothing but the ripple effect of(the) Vodafone case, said one of the three I-T officials cited above.

Section 195 of the I-T Act seeks to avoid revenue loss as a result of tax liability in the hands of a foreign resident, by deducting tax from payments made to them at source.

Most of the cross-border payments have been to countries like the US, UK and (the) Netherlands, among others. Assessees have voluntarily paid TDS to be on the safer side, the second I-T official said, but he did not disclose the nature of the cross-border deals.

The increase in TDS payments in Mumbai has come at a time when overall international tax collections for FY12 in the city have been flat at around Rs.14,000 crore. Mumbai contributes half of the total international tax collection in India.

N.C. Hegde, partner at audit and consulting firm Deloitte Haskins and Sells, attributed the record collection to a combination of the aggressive tax recovery drive by the I-T department last year and the Vodafone tax case fallout.

Payments made to non-residents have been under the close watch of the tax authorities. In fact, the department last year asked companies to electronically upload details of such payments along with a certificate of a chartered accountant at regular intervals to keep a tab on offshore transactions. Besides, the Vodafone case has created an impact because companies now dont want to take a chance with tax payments, said Hegde.

The tax department was directed by the Supreme Court to return a Rs.2,500 crore cash deposit with interest at the rate of 4% per annum and Rs.8,500 crore bank guarantees furnished by Vodafone after it ruled in favour of the telecom company.

In 2010, the I-T department had raised a tax demand of Rs.11,217.95 crore on Vodafone International Holdings BV, treating it as an assessee who defaulted for its failure to deduct tax at source/withhold tax before making a payment of $11.2 billion to Hutchison Telecommunications International Ltd (HTIL).

Vodafone paid $11.1 billion for a 67% stake of Hutchison Essar (since renamed Vodafone India) in 2007. Hutchison, the seller, controlled its Indian subsidiary through a web of companies that finally led to a Cayman Islands-registered firm to receive the payment from Vodafone.

The I-T department felt the Cayman Islands transaction was essentially a transfer of an Indian asset and said Vodafone should have deducted tax at source when it paid Hutchison. In 2007, Vodafone received a show-cause notice asking it why it had not done this.

Vodafone and the Indian tax authorities have since been at loggerheads. On 20 January, the apex court said Vodafone Group didnt have to pay more than $2 billion in taxes on a transaction to buy a controlling stake in the Indian mobile phone unit of Hong Kong-based HTIL.

Following the apex court judgement, finance minister Pranab Mukherjee outlined proposals to make retrospective changes in the I-T Act in the 16 March Union budget.

If approved, these will give the government powers to levy capital gains tax on similar overseas sales or transfer of shares where the underlying assets are in India.

Currently, at least eight other transactions, including Sanofi Aventiss acquisition of Shantha Biotech from another French firm, Kraft Foods Inc.s purchase of Cadburys,SABMiller Plcs acquisition of the Indian assets of Fosters from the Australian company, General Electric Co.s sale of 60% in Genpact India to private equity firms, and Tata Industriess purchase of AT&T Inc.s stake in Idea Cellular Ltd for $150 million, are under the scanner of the tax authority.

Net direct tax collections from April 2011 to January 2012 amounted to Rs.4.25 trillion, up 14.57% a year earlier. Mumbai accounts for about one-third of the countrys total direct tax collections.