Proposed cross-border M&A rules to hit aggressive tax planning

The Finance Ministry's decision to amend the Income Tax Act with retrospective effect from 1962 aims at bringing into net overseas deals concerning domestic assets. The amendments, once carried out, will have implications on Vodafone which won Rs 11,000-crore tax dispute case against tax authorities in the Supreme Court. The government had slapped tax on UK-based Vodafone, which had bought Hong Kong-based Hutchison's telecom business that included India assets, but lost the case. The amendments will impact other similar cases involving taxes to the tune of about Rs 30,000 crore. "The amendments made to Sec 2(14), Sec 2(47) and Sec 9 to counter Vodafone and similar transactions was anticipated but a retrospective amendment is surprising. We suspect that the constitutional validity of such an amendment will be questioned," Walker Chandiok & Co Partner & Practice Leader, Tax and Regulatory Services, Pallavi Bakhru said. Deloitte Haskins and Sells Partner Vipul Jhaveri said the conviction of the government's intent to check the application of Supreme Court decision in Vodafone’s case to similar transactions is clear. It is a signal to investors to desist from aggressive tax planning, he said. "One of the most significant amendments regarding taxability of cross-border M&A transaction involving indirect transfer of share or interest in an Indian company is sought to be laid to rest," Jhaveri said. He further noted, "In cross-border M&A one will have to watch out for the tool box of counter measures for tax avoidance in respect of transactions with persons located in notified jurisdictions that do not effectively exchange information with India." Experts also said that several policy, regulatory and procedural changes announced by Finance Minister Pranab Mukherjee will attract fresh investments and infrastructure and industrial sectors are likely to witness more buy-outs and consolidation. The government has also proposed removing the sectoral restriction on venture capital funds, a move that will allow more startups beyond the current nine sectors to get access to growth-stage capital. As per section 10(23FB) of the Income Tax Act, 1961, Sebi registered venture capital funds are eligible to invest in firms engaged in only nine sectors such as nanotechnology, IT and pharma.