The government has proposed to impose capital gains tax on overseas acquisitions if the acquired company holds over 50 per cent assets in India to plug the loophole that led to Vodafone disputing a tax claim on its USD 11.1 billion deal with Hutchison.

“It is strictly in the provisions of the (Direct Taxes Code) Bill that where a transaction takes place where company owns an underlying assets which are in excess of 50 per cent Indian assets then in that case, on a proportional basis, capital gain would be chargeable,” explained a Finance Ministry official after the Bill was tabled in Parliament.

The Bill, which aims to replace the Income Tax Act from April 1, 2012, contains this provision so that no tax dispute arises from this kind of transaction, as has happened in the case of Vodafone.

The clause that capital gains tax will be levied on a proportional basis, means that if 60 per cent of an acquired foreign company’s assets are in India, the acquirer will have to pay 60 per cent of capital gains tax.

Telecom major Vodafone had been disputing the claims of the Income Tax Department, saying that no tax is payable on its USD 11.1 billion deal with Hutchison in February, 2007.

In contrast, the I-T department has been claiming that it has full jurisdiction to tax Vodafone.

The dispute concerns Vodafone Group Plc’s acquisition of a 67 per cent stake in Hutchison Essar (since renamed Vodafone Essar) from Hong Kong’s Hutchison Telecommunications International Ltd for USD 11.1 billion in 2007.

The government approved the deal in May, 2007, itself. After regulatory clearances were given, the I-T Department raised a tax claim of around USD 2 billion on the transaction by Vodafone. Following the notice, the company approached the Bombay High Court.

After the High Court dismissed Vodafone’s petition challenging the I-T department’s notice, the company moved the Supreme Court in January, 2009.

The primary question that Vodafone requested the apex court to answer was whether Indian authorities have the jurisdiction to tax a transaction that occurred outside India between two global players.

The apex court ruled that authorities should deal with the fundamental question of whether the transaction falls within their tax jurisdiction. Simultaneously, the order has allowed Vodafone to approach the high court if it disagrees with the department’s tax assessment order.

Both the parties are now fighting the case in the Bombay High Court, after the Income Tax Department said it has the jurisdiction to tax Vodafone.

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