I-T scanning Vodafone-type deals for evasion

“We are now closely looking at other cross-border merger cases. We are examining these cases from the angle of probable tax evasion, Central Board of Direct Taxes (CBDT) Chairman S S N Moorthy told reporters here on Monday.

The court ruling on tax issues relating to the Vodafone-Hutchison takeover deal has widened the scope for tax authorities to look for probable tax evasion in similar type of cross-border merger cases, he said adding government would not lose its legitimate revenues.

Moorthy, however, refused to specify which of cross-border merger deals were being examined by the Income Tax Department to detect possible tax evasion.  The Income Tax department had served a show-cause notice on UK-based cell-phone operator Vodafone asking the company why tax should not be imposed on its acquisition of Hong Kong’s Hutchison Telecommunications stake in Indian telecom Joint Venture Hutch Essar for over US$11 billion in 2007.

As per an estimate made by tax accountants the tax on the transaction could amount to as much as Rs 12,000 crore including payment of penal interest. The Vodafone approached the Bombay High Court challenging the show-cause notice served by the Income Tax Department. The Income Tax Department in its show cause notice had pointed out that Vodafone’s deal was liable for tax because most of the assets were based in India and under Indian law, buyers have to withhold capital gains tax liabilities and pay them to the government.

Law of land

After a prolonged hearing that started in 2007, the Bombay High Court recently ruled that the Income Tax Department has the jurisdiction to levy tax on Vodafone, even though the multi-billion dollar deal was signed outside the country. The High Court has directed the Income Tax Department not to act on its tax order for eight weeks. The CBDT Chairman said that the Income Tax Department would  abide by the High Court order. “We will not take any action till the expiry of the time given by the High Court,” Moorthy said.

After the expiry of eight weeks from date of delivery of the verdict by the Bombay High Court the Income Tax Department would server the notice to the Vodafone for payment of tax, he said.

The Income Tax Department would insist upon recovering the evaded tax amount even if the Vodafone threatens to move the Supreme Court, Moorthy said.  However, he maintained that the Department would deal with the issue in accordance with provisions of law of land.