New Delhi: In a recommendation that could give relief to companies like Vodafone, a Government-appointed committee on Tuesday favoured prospective application of tax law and waiver of interest and penalty in case of retrospective application.
"...The provisions relating to taxation of indirect transfer as introduced by the Finance Act, 2012 are not clarificatory in nature and, instead, would tend to widen the tax base ... These provisions, after introducing clear definitions ... Should be applied prospectively," said Parthasarathi Shome panel's draft report on retrospective amendment relating to indirect transfers.
Prospective application of tax laws, the committee said, "would better reflect the principles of equity and probity in the formulation and implementation of commonly recognised taxation principles".
In case the government opts to apply the law retrospectively, the Committee said, it should waive interest and penalty.
Shome later said that several countries refrain from changing tax laws with retrospective effect.
Finance Minister P Chidambaram had asked tax expert Shome to look into the retrospective amendment to tax laws which had evoked sharp reaction from the international business community.
The then Finance Minister Pranab Mukherjee had sought to undo the Supreme Court judgement in the Rs 11,218-crore tax case which went in favour of Vodafone by making changes in the IT Act with retrospective effect.
The Income Tax Department had originally raised a demand of Rs 7,900 crore on Vodafone on its acquisition of Hutchinson's stake in Hutch-Essar through a deal in Cayman Islands in 2007.
Chidambaram had earlier said that he would like to settle all tax disputes both anticipated and pending.
The Committee said the provisions should apply prospectively after introduction of clear definitions. "This would better reflect the principles of equity and probity in the formulation and implementation of commonly recognised taxation principles," it added.
The report said taxation of capital gains on indirect transfer should be restricted only to capital gains attributable to assets located in India.
The capital gains, it suggested, should be taxed on a basis of proportionality between fair market value of the Indian assets and global assets of the foreign company, as proposed in DTC Bill 2010.
Transfer of shares or interest in a foreign company or entity under intra group restructuring, it added, should be exempted from taxation subject to the condition that such transfers were not taxable in the jurisdiction of the resident company.
In order to provide certainty to foreign investors, the Some Committee said that, subject to certain conditions, the government should not impose capital gains tax on companies resident in countries with which India has Double Tax Avoidance Agreement (DTAA).
In the cases pertaining to DTAA, it said, the capital gains should be imposed only in cases where the DTAA provides a right of taxation of capital gains to India based on domestic law.
These amendments, it added, could be carried out through amendments to the Income-tax Act, 1961 or Income-tax Rules, 1962 or by way of an explanatory circular.
These measures, the Committee said, would allay the apprehensions of taxpayers and yet protect the tax base from erosion on account of indirect transfer of underlying assets in India.