Taxing issues....

After a fortnight of uncertainty, mud slinging, et al, the state has come under President's rule. The State will now be run by the Governor. We have a lot of Chartered Accountant who run companies, we now have a Chartered Accountant who is running a state! Politicians are out and babus are in......

I have decided not to fill my blog about state politics, because by the time I type a few lines and publish it, the entire situation would have changed.

I turn my attention to another issue which has been running in my mind. It is the writ petition filed by Vodafone Essar against a show cause notice issued by the Income Tax Department in India.

For those of you who are not aware of what I am talking about, here it goes…..

Vodafone International Holdings BV, a Dutch company, acquired the entire share capital of CGP Investments from Hutchison Telecommunications International Limited (both entities registered in Cayman Island). CGP owns stakes in twelve companies including Indian and Foreign companies, which in turn hold shares in Vodafone Essar.

According to Vodafone Essar, Vodafone, CGP Investments as well as HTIL are registered and function outside India, therefore any gain on CGP investments' shares cannot be considered to have accrued in India and hence not taxable in India.

The IT Department’s contention is that the ultimate subject matter of transfer is a asset situate in India. Hence, it is an income which has its source in India and hence Hutchison is liable to pay tax in India. The IT Department has issued a notice to Vodafone Essar on August 6, asking them to show cause as to why HTIL is not liable to tax and why the same cannot be recovered from them as an agent of HTIL.

As a tax practitioner, I know the legal merits of the contention of Vodafone and HTIL. They may end up not paying any tax on the above transaction.

According to public reports, Hutch's gain before tax is likely to be nearly USD 9 billion (Ref: http://www.moneycontrol.com/india/news/business/hutch-completes-call-vodafone/280353) Even considering the current dollar rate the pre tax gain is a staggering Rs 36,000 crores!! Apply the tax rate, applicable to long term capital gains earned by non-residents (ie tax rate including surcharge and cess) the tax payable exceeds Rs 8,000 crores!!! This collection alone can replace the higher education cess introduced on all taxes!!

I just want an answer to the below question from any body other than a tax expert:

“Can a company make a profit of Rs 36,000 crores by selling a business entirely built and operated in India and not pay a single Rupee of tax to the Indian Government?”