HC directs ITAT to decide on tax cases within three months

HC directs ITAT to decide on tax cases within three months

5:44 PM Add Comment
Corporate taxpayers can now hope for speedy justice. The Bombay High Court has set aside an order of the Income Tax Appellate Tribunal (ITAT) on the ground that the tribunal took four months to deliver the order.

Delivering the order, a division bench comprising Justice VC Daga and Justice S Radhakrishnan observed that justice delayed is justice denied, but justice withheld is even worse. Observing that often orders are passed four to 10 months after the tax cases have been heard, the court issued a guideline to the ITAT asking it not to take more than three months to give an order. The division bench also directed ITAT that its order should be self-containing and reasoned.

HC gave this order on an appeal filed by Shivsagar Veg Restaurant. The appeal was based on the inordinate delay by ITAT in giving out the order. The taxpayer also alleged non-application of mind as the order did not furnish reasons in detail, did not discuss the issues raised by the taxpayer and did not cite the case laws.

The HC said that since ITAT is the final authority on facts, the tribunal is required to appreciate the evidence, consider the reasons of the authorities below and assign its own reasons as to why it disagreed with the findings of the authority below. This would help the HC, where appeals are filed on questions of law, to have a clearer understanding of the issues that come up before it, the division bench said.

“Merely because the tribunal happens to be an appellate authority, it does not get the right to brush aside reasons or the findings recorded by the first authority or the lower appellate authority. It has to examine the validity of the reasons and findings recorded,” the bench added. K Shivram, who appeared for Shivsagar Veg Restaurant told ET: “ITAT president Vimal Gandhi had issued detailed guidelines (on speedy clearance) to ITAT members sometime ago. However, those guidelines are not being followed by the ITAT members.”

[Source: The Economic Times]
Pending tax refund up to Rs 25,000 to be given soon

Pending tax refund up to Rs 25,000 to be given soon

5:43 PM Add Comment
Quick income-tax refunds may come because the government has asked the I-T department to soon process refund claims up to Rs 25,000 for every assessee whose tax is deducted at source (TDS) for 2007-08.

"The Income-Tax Department has instructed the field formations to accept the TDS-payer's claim, with certain exceptions ... where the refund computed does not exceed Rs 25,000," a Finance Ministry official said.

Taxpayers for long have been complaining about delays in getting refunds. The department, though, holds a different view and says that it has been making efforts for speedily processing refund payment.

"We have given refunds of about Rs 41,000 crore in 2007-08, and about Rs 25,000 crore in 2008-09 till November 30," the official said.

The problems arise because taxpayers are also not careful about giving relevant information on their returns, he said, adding I-T authorities are often not informed when taxpayers change residence.

[Source: The Times of India]
Service exporters yet to get Rs 1k cr in tax refunds

Service exporters yet to get Rs 1k cr in tax refunds

5:42 PM Add Comment
Even as the government steps up efforts to stimulate flagging exports, more than Rs 1,000 crore in refund claims to services exporters are believed to be pending with the Services Tax Commissionerate in various parts of the country.

There are 104 services that form a part of the export status category, including banking and financial services, insurance, telecom and supporting businesses, such as BPOs and KPOs.

The sticking point, according to services exporters, is a condition that puts the onus on the exporter to prove that the services executed in India are used outside the country to claim a refund on input services. In Delhi, for instance, exporters are asked to establish the export nature of their transactions. The other common reason for claims being withheld is non-submission of documents like foreign inward remittance certificate — which details that convertible foreign currency has been remitted from overseas and has to be acquired from the bank in which the exporter has an account.

Exporters maintain that while on the one hand the government has issued clarifications directing its officers to sanction 80% of the refund amount within 15 days of filing of the claim, notices were issued to recover the same refund granted along with interest under the above procedure.

There are several instances, they said, where the local officer has passed the claim and the pre-audit wing within the department sits on it for a number of days and then, just to suppress its inefficiency, generates a query to return the file back to the local officer.

“The sheer size of refunds scares the tax officer to take upon himself the onus of sanctioning refund claims. He then finds excuses to pass the buck to a higher forum by rejecting the claim, which in turn results in exporters’ funds being locked up and undue litigation cost and time,” said an exporter with a “sizeable” refund claim. “Fortunately,” added the exporter, “the principle of export is by and large settled by the courts and, hence, the objections earlier being raised on proving export status are diminishing, though in certain jurisdictions these objections are taking new form and shape.”

Even as services exporters now look up to the finance ministry to get a tax refund on inputs for providing such services, Gautam Bhattacharya, commissioner (service tax), Central Board of Excise and Customs (CBEC), said he hadn’t been approached so far with any problems related to procedural issues.

“I would like any affected party to come up and make a representation to me if there has been an issue. So far, there has been a representation by services exporters in respect of the condition that puts the onus on exporters to prove their services performed here were used outside the country. I haven’t come across any problem of a procedural nature,” said Mr Bhattacharya.

When contacted, Sachin Menon, executive director, indirect tax, PricewaterhouseCoopers, said the need of the hour was to “fix” personal accountability on officers and to follow judicial discipline in allowing credits based on court rulings. He added that while the service tax commissioner in Mumbai has done a commendable job in personally taking an initiative and issuing a diktat to his officers to process refund claims on a priority basis, the results were yet to be seen.

[Source: The Economic Times]
I-T department to investigate frozen demat accounts

I-T department to investigate frozen demat accounts

5:38 PM Add Comment
The income-tax department will start investigation into lakhs of frozen demat accounts to unearth black money and undisclosed transactions in them.

The money in these accounts could run into thousands of crores, sources in the department said. Certain preliminary checks have revealed undisclosed transactions and accounts that have not been disclosed, have been used to hide black money, a tax department source said. The accounts were frozen by the two depositories, National Securities Depository Ltd (NSDL) and Central Securities Depository Services Ltd (CDSL), on January 1, 2007.

This move came after lakhs of investors failed to comply with the government’s directive to furnish details of their Permanent Account Number (PAN) while transacting in the financial markets.

“We have received a list of suspicious accounts and investigation (into those) will start,” the source said.

Tax department sources said that with the help of the unique PAN numbers they have been able to track down shareholders who are not running their accounts. In certain cases the account-holder may have died, and some may have changed addresses and did not inform the department, a source said.

Even after the accounts were frozen, some investors are receiving money in the form of allotment of shares in IPOs and certain other ways, they said. According to the data available on December 15, about one lakh accounts with cash balances in them are with CDSL while about 5.5 lakh such accounts are with NSDL.

While there were 2.6 lakh such accounts with CDSL on December 31, 2006, with NSDL it was 18 lakh. The government made quoting PAN mandatory with effect from April 1, 2006, and, with the help of the two depositories, started freezing non-PAN accounts beginning Jan 1, 2007. Securities in the frozen accounts consist mostly of shares from primary and secondary markets.

[Source: The Financial Express]
Speedy disposal of I-T cases

Speedy disposal of I-T cases

5:37 PM Add Comment
The Bombay High Court has directed the president of the Income Tax Appellate Tribunal to frame and lay down the guidelines for speedy disposal of the matters pending before the Tax Tribunal.

Moot question before the HC was whether the order passed by the Tribunal after more than four months from the date of hearing without dealing with propositions and case laws relied by the appellant is bad in law.

The court held that the omission to make reference to the contentions canvassed can only be attributed to the delayed delivery of judgement. The court also directed that suitable guidelines should be framed and issued by the president within shortest possible time and followed by all the benches of the Tribunal.

All the revisional and appellate authorities under the I-T Act are also directed by the HC to decide the matters heard by them within three months from the date case is closed for judgement.

[Source: The Economic Times]
Now, brokerage & insurance services likely to come under TDS ambit (2008-09)

Now, brokerage & insurance services likely to come under TDS ambit (2008-09)

5:06 PM Add Comment
Brokerage, insurance and business auxiliary services are some of the services which may soon be brought under the tax deducted at source net and taxed at the rate of 10%. These are some of the professional services that a high-level committee set up by the Central Board of Direct Taxes (CBDT) has recommended should be brought under the TDS net.

The committee, which was set up to study the possibility of expanding the scope of TDS by including more professional services, has said in its report that most of the over 100 services under the service tax net can be brought under the ambit of “professional services”. It has compiled a list of such services which also include professionals such as brand ambassadors, management consultants and financial planners. At present, the income of such professionals attracts only 12.36% service tax.

Professional services are taxed in accordance with Section 194J of the Income Tax Act. This implies if the fee for professional or technical service contract undertaken by any of the listed professionals is more than Rs 20,000, the contract awardee has to deduct tax at the rate of 10%.

But while the department is quite keen to levy TDS on these services immediately, officials said this may not be an appropriate time for such a move. “Given the economic downturn where services such as brokerage and insurance have already taken a hit, this may not be the right time to increase the tax on them,” an official said. Hence, in a partial relief to such professionals, the department plans to bring these services under the TDS net in the Budget next year.

With direct tax receipts slowing down, the CBDT is focusing on strengthening collections through the TDS mechanism. It has already re-structured its TDS administration. Earlier this year as well, the CBDT had classified sportspersons, umpires, referees, coaches, trainers, team physicians and physiotherapists, event managers, commentators, anchors, and sports columnists as “professionals” and brought them under the 10% TDS rate. Earlier they had to deduct tax at source on their earnings at merely 1% to 2%.
Corporate advance tax collections in Mumbai falls first time in 5 years

Corporate advance tax collections in Mumbai falls first time in 5 years

4:56 PM Add Comment
Corporate advance tax collections in Mumbai, which contributes about 35-40% to the country's tax kitty, have fallen below last year's level,
thanks to the general slowdown in the economy. This is the first time in the last five years that advance tax collection from Mumbai has fallen.

Advance tax collection from various industries in the April-December period have fallen 12% to Rs 40,600 crore, belying initial government estimates that the collections would at least increase by 20%. Last year, the collection in the same period grossed Rs 44,230 crore.

As per the advance tax figures up to December 26, the sectors which recorded a fall in collections include oil, petroleum, petroleum products, manufacturing, automobiles, pharmaceuticals, cement and others. However, industries that saw a considerable growth in tax outgo included banking, engineering and insurance sectors.

Tax collection by way of TDS (tax deducted at source) registered an increase of over 34% to Rs 29,000 crore, taking the total tax collection to Rs 83,400 crore. The rise in TDS collection marginally helped the department to offset the drop in advance tax collection and take the consolidated tax collection higher than the collections last December, said tax department officials.

For now, the total collection from Mumbai, including advance tax and TDS, is 6% more than that collected in the April-December period last fiscal year. This however, does not offer any solace to tax collectors as rate of growth in collection last year exceeded 60%.

The collection figures offer a grim picture as about 75% of the advance tax is collected in December, when the third of the four instalments of advance tax payment is due. So far, Mumbai has managed to collect Rs 83,400 crore, while the projection for the whole fiscal is Rs 157,000 crore.

This, according to tax officials, was largely due to the slow performance of corporates in most sectors. The oil sector recorded a 71% decline over last year's payments, while the software sector saw a 21% fall; pharmaceutical companies' tax fell 27% and cement by 23%. The tax outgo from domestic banks surged 34%, while revenue from foreign banks rose 23%. Tax collections engineering industry has risen 30%.

Collection via the securities transaction tax was another blow. STT figures which is a reflection of the dynamism of the stock market, plunged 32% to Rs 4,455 crore.

The projection for all India tax collection this fiscal year is Rs 4,00,000 crore, out of which Rs 157,000 crore is expected to be generated from Mumbai. Meeting the target is going to be difficult unless there is a dramatic improvement in the economic situation in the next couple of months, said tax officials. The department is currently exploring all available channels for meeting the target, they added.
CBDT gives new meaning to charity

CBDT gives new meaning to charity

4:50 PM Add Comment
Chambers and other such trade organisation that were apprehensive of coming under tax net after the government expanded the dfinition of
"charitable organisations" in the budget 2008-09 can breathe easy now.

To clear the air on the issue, the Central Board of Direct Taxes has issued a detailed circular defining what constitutes charitable.

Industry bodies claim exemption from income tax under Section 11 on the ground that their objects are for charitable purpose as they are covered under 'any other object of general public utility'. "Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such associations is not chargeable to tax," the circular said. But, there would have be complete identity between contributors and participants.

If industry or trade associations claim both to be charitable institutions as well as mutual organsiation and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the new provision on charitable organisations owing to principle of mutuality. However, if such organisations have dealings with non-members, their claim to be charitable organsiation would no be governed by the additional conditions stipulated in the new provision.

To ensure that only genuine charity is able to get tax benefits, the government had modified the definition of charitable by adding a new provision. The Income Tax recognises "charitable purpose" to cover acitivities related to relief of poor, education, medical relief and advancement of any other object of general public utility. Since, the last activity "advance ment of any other object of general public utility" had made the definition very open ended, the government amended it saying if the charitable purpose involved any other activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, it will not be charitable.

Relief of poor will cover wide range of objects for the welfare of the economically and socially disadvantaged or needy and will include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women, children, small and marginal farmers, indigent artisans or senior citizens in need of aid."Entities who have these objects will continue to be eligible for exemptions even if they incidentally carry on a commercial acitivity, subject to conditions-- the business should be incidental to the attainment of the objectives of the entity and separate books of accounts are maintained for each business.

However, if the taxpayer is engaged in any activity in the nature of trade, commerce or business or service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose." In such a case, the object of 'general public utility ' will be only a mask or a devise to hide the true purpose which is trade, commerce or business and each case would be decided on its own facts, the circular said.

Get Circular Here - Circular Free Download
No tax on membership fee of industry bodies

No tax on membership fee of industry bodies

4:48 PM Add Comment
Industry chambers apprehensive of losing tax benefits can breathe easy. The Central Board of Direct Taxes has issued a circular
clarifying activities that are termed as charitable and be eligible for income tax benefits.According to the circular, industry associations generating income from membership fees will not come under the tax net.

”Under the principle of mutuality, if the trading takes place between people who are associated with each other and contribute to a common fund for the financing of some venture, any surplus returned to members is not taxable,” the circular said.

To ensure that only genuine charitable bodies are able to get tax benefits, the government had modified the definition of a charitable body by adding a new provision. The income tax department recognised a "charitable purpose" as an organisation that covered activities related to the relief of poor, education, medical relief and the 'advancement of any other object of general public utility'.

Since the last definition made the definition very open ended, the government amended it by adding: “If the charitable purpose involves any other activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess, or fee, or any other consideration, it will not be considered a charitable body.”

The amendment had led to a huge hue and cry with many organisations, such as key industry chambers representing the government.

To clear the air on the issue, the CBDT has now issued a detailed circular defining what is a charitable body.Industry bodies claim exemption from income tax under Section 11 on grounds that their objects are for a charitable purpose as they are covered under 'any other object of general public utility'.

If industry or trade associations claim to be charitable institutions as well as mutual organisations and their activities are restricted to contributions from and participation of only their members, they would not fall under the purview of the new provision on charitable organisations owing to the principle of mutuality.

However, if such organisations have dealings with non-members, they will incur tax.
New tax code to stop treaty shopping

New tax code to stop treaty shopping

4:46 PM Add Comment
The government may introduce provisions in the new direct tax code to prevent misuse of double taxation avoidance agreements India has
with other countries.

The new code is likely to be unveiled before the year ends. A government official said a discussion paper on the code, a major initiative undertaken under the guidance of the former finance minister and present home minister P Chidambaram, is being fine-tuned.

“A discussion paper on the code explaining the rationale behind every change would be placed in the public domain,” the official added. A draft bill on the code may also accompany the paper to enable everyone to express their views on the proposed changes.

Double taxation treaties are essentially agreements between two countries that seek to eliminate the double taxation of income or gains arising in one country and paid to residents/companies of the other country. The idea is to ensure that the same income is not taxed twice. In many instance, however , these agreements are misused to evade taxes. This is called ‘treaty shopping,’ where usually residents of a third country take advantage of a tax treaty between two countries.

For example, many companies in other countries route their investments into India through Mauritius or Cyprus to take advantage of the tax treaty that these countries have with New Delhi. Both, India-Mauritius and India-Cyprus tax treaties provide that capital gains arising in India from the sale of securities can only be taxed in Mauritius and Cyprus. This means no capital gains tax on investments in securities routed through Mauritius and Cyprus, as they do not levy tax on capital gains.

The discussion paper on the code would explore ways to check this treaty-shopping. Mr Chidambaram was actively involved in the exercise of drafting the code. At the Economic Editors Conference in November, he had said the draft code would be placed in the public domain soon. “I have to read another 19 pages of the discussion paper. The discussion paper and the draft is ready,” he had said.

Some options like a general anti avoidance rule(GAAR), provisions allowing examination of the real nature of a transaction and a limitation of benefits clause are being actively examined. Many countries like Singapore and Canada have a general avoidance provision, GAAR in their domestic income-tax laws to ensure that treaty benefits accrue only to genuine investors. Singapore also allows examination of the real nature of a transaction.

Earlier, an internal panel in the income-tax department, which examined the issue of treaty abuse and ways to prevent it, had also made recommendation in favour of GAAR and a special provision for examination of real nature of transaction.

A special provision allowing for examination of the real nature of a transaction in the present income-tax law would have given Indian tax authorities a natural right to examine Vodafone Group Plc’s $11.2-billion transaction to acquire controlling stake in Hutchison Essar, a company based in India.

Vodafone has not given the income-tax (I-T ) department the confidential documents related to the transaction that involved transfer of stake by the offshore entity which held stake in Hutchison Essar to another offshore entity owned by Vodafone.

Indian tax authorities want to tax the transaction on the ground that it involved transfer of an Indian asset and have got a major boost after the Bombay High Court dismissed the telecom company’s writ petition against the show-cause notice of the I-T department.

The government had attempted to bring in some antiabuse provisions in the Union Budget, 2007-08 , but had dropped the idea in favour of the code, work on which had already begun by then.
Advance warning, Tax mop-up dips 22% for Dec 2008

Advance warning, Tax mop-up dips 22% for Dec 2008

4:44 PM Add Comment
Indicating slowdown in economic growth, advance tax collections declined in the third quarter, ending December, by over 22% to Rs 42,600
crore from Rs 54,900 crore a year ago. For the first three quarters ended December 15, advance tax collection fell 2.6% to Rs 1,13,000 crore from Rs 1,16,000 crore in the corresponding period last year, a finance ministry official, who did not wish to be identified, said.

This brings down the growth rate in direct tax collections for the first nine months to 12% and raises the distinct possibility of the government missing the budget target of a 15% increase in direct tax collections this fiscal to net Rs 3,65,000 crore. Personal income tax deducted at source has shored up aggregate collection of direct taxes, which comprise taxes on corporate incomes — including dividend distribution tax and fringe benefit tax, taxes on personal incomes, securities transaction tax and a minuscule amount of wealth tax, apart from collections of arrears on these counts.

Advance tax is paid in four instalments by corporate and non-corporate assessees other than salaried employees in June, September, December and March, and is based on the taxpayers’ own estimates of their incomes. It, thus, gives an indication of overall economic health. The last date for payment of the third instalment of advance tax was December 15. The fourth and the last instalment will fall due on March 15. Salaried employees have their tax deducted at source on a monthly basis.

Direct tax collections in November 2008 had dropped 36.09% to Rs 10,346 crore from Rs 16,189 crore in November 2007.

The drop in direct tax collections in November and subsequently in advance tax has pulled down the cumulative growth rate from 22% in April-November, 2008 to about 11% in April-December, 2008. Collections stood at Rs 2,32,000 crore till December 24, 2008, compared to Rs 2,08,000 crore in April-December, 2007. A growth rate of 15% is required to meet the budget estimate of Rs 3,65,000 crore in the current financial year. The official said it may now be difficult to achieve the Central Board of Direct Taxes' internal target of Rs 3,95,000 crore.

Last four financial years have been a sort of a dream run for direct taxes, which witnessed an over 30% compound annual growth rate in the period on the back of a booming economy. But the slowing economy has cast its shadow on the direct taxes as well. India’s GDP grew 7.8% in the first six months of the current fiscal against 9.3% in the same period last fiscal. Industrial production in October declined by 0.4% for the first time in 15 years, clearly indicating that the manufacturing sector had been impacted by the global financial meltdown.
HC relief for foreign law firms on tax payment

HC relief for foreign law firms on tax payment

4:42 PM Add Comment
In a significant order, a division bench of the Bombay high court has ruled that foreign law firms, even though working as solicitors for
multinational corporations with operations in India, will pay tax only in those countries where they give legal advice and not in India.

The order came after legal eagle Harish Salve argued that courts must consider the place where a solicitor gives professional advice and not the place of the project for which such advice is sought. "A legal professional has no stake or interest in the project, he is available at any time to the client for advice on all legal issues,'' Salve said.

The appelant before court was Clifford Chance, a top-notch legal firm from London which acted as solicitors for several multinational corporations interested in four major power projects in India. The clients included big names such as GEC Alsthom Group, and Electricite de France.

Clifford Chance told court that it billed its clients on an hourly basis and maintained detailed "time sheets'' that showed whether the legal advice was given in India or abroad. On that basis, the firm calculated that it had earned a little over Rs 5 crore from its India operations during 1996-97. Ispat Industries was the only Indian firm involved in one of the four power projects.

On the contrary, the income tax department said that Clifford Chance had received more than Rs 17 crore in legal fee for acting as advisors on the four power projects and it was immaterial whether the advice was given in India, UK or any other country. It said that the whole income was taxable in India as the projects from which it was derived were in India.

However, Salve argued that legal service given by a solicitor from his home country to a client who was overseas could be taxed only in the country of residence of the solicitor.

Finally, justice S Radhakrishnan and V C Daga ruled that under statutory provisions, services which are to be taxed must be both "rendered in India'' and "utilized in India'' for them to fall under the income tax bracket. The court held that this was not the case with Clifford Chance's earnings which came from giving legal advice to its clients in other countries, even though the power projects were in India. Thus it said that tax could be levied only on Rs 5 crore that the solicitors had earned by giving legal advice to firms in India.


3:47 PM Add Comment
The government has asked the I-T department to soon process refund claims up to Rs 25,000 for every assessee whose tax is deducted at source (TDS) for 2007-08. “The Income- Tax Department has instructed the field formations to accept the TDS-payer’s claim, with certain exceptions … where the refund computed does not exceed Rs 25,000,” a Finance Ministry official said.

Taxpayers for long have been complaining about delays in getting refunds. The department, though, holds a different view and says that it has been making efforts for speedily processing refund payment. The problems arise because taxpayers are also not careful about giving relevant information on their returns, he said, adding I-T authorities are often not informed when taxpayers change residence.
Income Tax exemption on home loans may be doubled

Income Tax exemption on home loans may be doubled

3:47 PM Add Comment
The government is considering a proposal to double the income tax exemption limit on housing loans to Rs 3 lakh from the current level of Rs 1.5 lakh, according to government sources. The proposal is being discussed by the committee of secretaries that was set up in the wake of the global financial crisis affecting the Indian economy. Industry lobby groups have been urging the government to raise the limit as it will reduce the cost of borrowing on home loans.

On December 7, the government had virtually unveiled a mini-budget that included Rs 20,000 of additional spending on infrastructure and cut excise duty across-the board. It also provided a package for banks aimed at making home loans cheaper.
CAs to be restricted from taking non-audit work

CAs to be restricted from taking non-audit work

3:46 PM Add Comment
The government will be preventing Chartered Accountants from offering consultancy and advisory services to the companies which hire them for auditing their accounts. This is being done to lend greater credibility to company accounts. The statutory auditors, who vet the financial accounts of a company, will be restricted from providing their corporate clients services such as investment management, actuarial services and investment banking.

The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services. Under the guidelines proposed in the new legislation, statutory auditors will also be prohibited from providing services like design and implementation of financial information system, investment advisory, rendering of outsourced financial work and management services.

The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements. “The proposal seeks to place specific restrictions on the services which a chartered accountant, acting as a statutory auditor, can provide for his client,” says Institute of Chartered Accountants of India president Ved Jain, adding the proposal will help avoid conflict of interests. The move may come as a major damper for many practising CAs who have been providing audit as well as consultancy services for their clients.
Tax sword looms large on cross-border acquisitions

Tax sword looms large on cross-border acquisitions

3:43 PM Add Comment
Since August last year, the world has been watching. It all began with a show cause

notice issued to Vodafone BV (based in the Netherlands),
holding it to be an
“assessee in default” for not withholding tax at source when it made payments to a Hutchison Group company (based in Cayman Islands) for acquiring shares of another Cayman Island company.

Such change in shareholding resulted in a change in the controlling interest of an operating Indian cellular services company. True, the tax demands raised ran into several millions, $2 billion approximately. But this is not the reason for the attention that this case has attracted.

The main reason is that the very foundation of international tax norms appeared shaken. It has been a well accepted view that while gains arising to a non-resident from transfer of shares in an Indian company are liable to tax in India (subject to tax treaty provisions as in some tax treaties, the gain is not taxable in the source country), the gain arising to a non-resident from transfer outside India of shares of a foreign company to another non-resident would normally not be chargeable to tax in India. This is the case, even if the underlying value is derived from assets belonging to an Indian subsidiary of the company, whose shares are transferred.

Vodafone BV (Vodafone NL), a Dutch subsidiary of Vodafone UK, entered into an agreement with Hutchison Telecommunications Cayman Island (HTIL) for acquiring share capital of CGP Investments (CGP), which is a company incorporated in Cayman Islands.

Through CGP, HTIL — the seller — owned 67% controlling interest in Hutch Essar (HEL, now ‘Vodafone Essar’ — a JV between the Hutch and Essar group), engaged in cellular services business in India.

When it got the show cause notice, Vodafone NL filed a writ petition before the Bombay High Court, which now stands dismissed. The HC made several observations while dismissing it. It did not accept the argument of Vodafone that the transaction was between two foreign companies, involving transfer of shares of another foreign company, and had no nexus or tax implications in India.

In the view of the high court, prima facie, the transaction attracted capital gains tax liability in India as the sole consideration and the predominant object of the transaction was transfer of business or economic interest or controlling interest in the telecom company in India.

According to the high court, post transfer, the Vodafone group acquired interest in the telecom licence, brand and goodwill, right to appoint board of directors, apart from acquiring entry into the telecom business segment in India.

The transaction was regarded as achieving effective substitution of Vodafone Group in the place of Hutch Group in the joint venture/partnership, which the Hutch Group had with Essar Group in India. The transfer of shares of a foreign company was held to be mode of achieving the transfer of valuable assets in India, attracting tax implications.

e high court remarked: “In the instant case, the subject matter of transfer as

contracted between the parties is not actually the shares
of a Cayman Island company,
but the assets situated in India”.

The high court also emphasised that representations made before FIPB and regulatory authorities in the US and Hong Kong made it clear that the Hutch Group was transferring its controlling interest in the Indian companies.

The high court has made fairly strong observations on the petitioner having failed to furnish agreements relating to the transaction, either to the tax department or to the court, despite repeated requests — in the absence of which it was not possible to appreciate the true nature of the transaction and it was left with no option, but to draw an adverse inference against Vodafone NL.

The high court emphasised that the writ jurisdiction is discretionary and that, only in extraordinary cases a mere show cause notice, seeking explanations can be struck down as invalid.

In the light of the developments, the question that now arises is: merely because the Indian company is held by a special purpose vehicle, could such parent company be regarded as the owner of assets belonging to the underlying Indian company?

Reference may also be made to the Supreme Court decision in the case of Mrs Bacha F Guzdar (27 ITR 1), which held that the company is a legal entity, separate and distinct from its shareholders and there is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company.

In the course of its submissions, Vodafone NL did point out on the absurdity of the views of the revenue authorities. To illustrate — would purchase of 1,000 shares of XYZ Inc, a multinational company, with global operations, on the New York Stock Exchange be tantamount to transfer of assets (underlying value) of the Indian subsidiary?

The high court appears to have been guided by cumulative appreciation of the facts of the case viz that, in the facts on hand, there was acquisition of a business presence. But, even assuming that what was transferred was “controlling interest”, the term does not find any reference in tax law pertaining to capital gains and is not an asset separate from shares.

In the absence of a specific provision in the Indian law, taxation in respect of such a transaction should ordinarily not arise in India, when shares of a foreign company are transferred between two non-residents, merely because on such transfer there is an indirect shareholding in an Indian business entity.

It should be noted that, even today, transfer of shares in an Indian company by a Mauritius company — which submits tax residency certificate — does enjoy exemption from capital gains in India, as in this case the treaty provides that the taxing rights of the capital gains vest with the country of residence and not the source country (where capital gains arise).

The SC, in Azadi Bachao Andolan case (263 ITR 706), has held that an Act, which is otherwise valid in law, cannot be treated as non est (non-tenable) on the basis of the underlying motive.

While the high court has not given any definite conclusion, it has made observations that may be followed by the revenue authorities in assessing similar transactions. Such actions, if any, could spell uncertainty for and cause anxiety in respect of all genuine international takeovers merely because there may be a change in controlling or business interest in the underlying Indian subsidiary.

(The author is tax partner, Ernst & Young)
COST INFLATION INDEX (CII) for FY 2008-09 (AY 2009-10)

COST INFLATION INDEX (CII) for FY 2008-09 (AY 2009-10)

3:37 PM Add Comment

NOTIFICATION NO. 86/2008, DATED 13-8-2008

In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to seventy-five per cent of the average rise in the Consumer Price Index for the Financial Year commencing from the 1st day of April, 2007 and ending on the 31st day of March, 2008 for the urban non-manual employees, hereby specifies the Cost Inflation Index for the Financial Year commencing from the 1st day of April, 2008 and ending on the 31st day of March, 2009 and for that purpose further makes the following amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Central Board of Direct Taxes number S.O.709(E), dated the 20th August, 1998, namely:-

In the said notification, in the Table, after serial number 27 and the entries relating, thereto, the following serial number and entries shall be inserted, namely
2008-09 582

1981-82 - 100 1993-94 - 244

1982-83 - 109 1994-95 - 259

1983-84 - 116 1995-96 - 281

1984-85 - 125 1996-97 - 305

1985-86 - 133 1997-98 - 331

1986-87 - 140 1998-99 - 351

1987-88 - 150 1999-00 - 389

1988-89 - 161 2000-01 - 406

1989-90 - 172 2001-02 - 426

1990-91 - 182 2002-03 - 447

1991-92 - 199 2003-04 - 463

1992-93 - 223 2004-05 - 480

2005-06 - 497

2006-07 - 519

2007-08 - 551

2008-09 - 582


3:21 PM Add Comment
The Commissioner of Sales Tax, Maharashtra State has issued Notification dated 20th December, 2008 making the E-filing of Returns applicable for ALL the registered dealers.

Mandatory E-filing of Returns is applicable for -

* Registered Dealers to whom the Explanation to clause (8) of Section 2 applies and whose tax liability during the previous year was rupees one crore or less, in respect of the period starting on or after 1st April, 2008.

* Other Dealers, in respect of the period starting on or after 1st October, 2008.
Service Tax For Dry cleaning Services

Service Tax For Dry cleaning Services

3:19 PM Add Comment
Dry cleaning services provided to a customer by a dry cleaner is liable to service tax. Dry cleaner has been defined as any commercial concern providing service in relation to dry cleaning.

The term commercial concern denotes a firm or a business entity or organisation engaged in commercial activities like sale, purchase or providing services for consideration with a profit motive.

Thus, a hotel’s in-house dry cleaning facility is a commercial concern and liable for service tax if charged for separately. Dry cleaning of own clothes, linen and bedding is not covered. For the service to be taxable, it must be rendered to the guests/customers.

However, if the hotel engages a dry cleaning concern to do the job, then the hotel will step into the shoes of the customer and the dry cleaning concern will be liable to pay service tax.
Service tax Levy For Fashion Designers

Service tax Levy For Fashion Designers

3:18 PM Add Comment
The government, in a circular dated 1 August 2002, has clarified that sometimes fashion designers not only provide designing service but also make garments or intended articles as per the requirement and charge fees in a composite manner for designing as well as making of garments. The service tax levy covers only the fashion designing service. Making of garments is outside the purview of the levy. Therefore, service tax will be leviable only on designing charges, provided the fashion designer shows the designing charges and making charges separately in the bill. However, if consolidated charges are shown, then service tax will be on the entire amount.
Taxation Of Mutual Funds - Investment Or Stock In Trade

Taxation Of Mutual Funds - Investment Or Stock In Trade

3:15 PM Add Comment
Normally it should be taken that the units are held as investments. You can claim the income distributed by the mutual fund as exempt under Section 10(36).

If you hold the units for 12 months or less the loss arising out of the sale will be short-term capital loss which can be set off against either a short-term capital gain or a long-term capital gain of the same year. The balance, if any, can be carried forward and set off against either a short-term capital gain or a long-term capital gain within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

If you hold the units for more than 12 months, the loss arising out of the sale will be a long-term capital loss which can be set off only against a long-term capital gain of the same year. The balance, if any, can be carried forward and set off against a long-term capital gain eight assessment years immediately succeeding the assessment year in which the loss was first computed.

If investment in mutual fund is taken as investment it will be shown in your books, and, for tax purposes, at the amount invested and not at the lower of cost or market price.

The provisions of Section 94(7) will not affect the set off or carry forward and set off of losses. Under Section 94(7), if:

*any person buys or acquires any securities or unit within three months prior to the record date;

*such person sells or transfer such securities or unit within three months after such date;

*the dividend/income on such securities or unit received or receivable by such person is exempt.

Then, the loss, if any, incurred by him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purpose of computing his income chargeable to tax.

This provision, in effect, will mean that if a share or unit is purchased within three months prior to the record date and if it is sold within three months from such record date, the loss arising there from will be ignored to the extent of dividend/income from such securities or unit which enjoyed the exemption.

The excess loss over such dividend/income can, however, be set off or carried forward and set off in the manner stated above.
Basics Of Calculating HRA Exemption

Basics Of Calculating HRA Exemption

7:09 PM 1 Comment
House Rent Allowance(HRA) is part of salary package

calculation of HRA exemption.

Least of following three will be exempted
*Hra received
*50% of salary in case of residential accommodation taken on rent is situated in Bombay ,Calcutta ,Delhi, or Madras (Chennai) and 40 % of salary in in any other case.
*rent paid in excess of 10 % of salary

other points to be noted

Salary for this purpose mean
-Basic salary
-Dearness Allowance if terms of employment so provides.
-commission based on a fixed percentage of trunover.
-all other allowances and perquisites is to be excluded.
-Salary related to period of rent should only be considered on due basic .
-Salary received in period as advance or arrear not related to calculation period should not be included.

For calculating 40/50 % as per point 2 above place of residential accommodation is important ,not where the person is working.suppose Rajiv taken a house in Delhi on rent but has working in Rohtak than he is eligible as per point 2 upto 50 % as house is situated in Delhi.

The calculation should be done on separately(monthly) if salary or HRA has varies during the year.
No,Hra exemtion if Hra paid is less than 10 % of salary.

Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.


8:06 AM Add Comment
Recently, many industry organisations in the country have received notices from the Income-tax department asking them to pay advance tax because the amendment to Section 2(15) in the last Budget made them ineligible for the exemption meant for entities working for “charitable purpose.” As per the new definition of charitable purpose in Finance Act 2008, advancement of any object of public utility, which was earlier considered to be “charitable purpose,” is now not so if it involves the “carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration...”

The industry bodies are however contesting the notices citing the remarks made by finance minister P Chidambaram while replying to the debate on Finance Bill 2008 in parliament. He assured the House that “genuine charitable organisations will not in any way be affected” by the
amendment and that the CBDT would issue an explanatory circular containing guideline for determining whether an entity is a genuine charitable organisation. He had further said, “Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, chambers of commerce and similar organisations rendering services to their members would not be affected by the amendment...“ However, the CBDT has since not issued any explanatory circular to clarify the matter. And the chambers and industry bodies who received notices from the I-T department are a worried lot.


8:03 AM Add Comment
1) Qus. : What are you doing?
Ans.: Business.

2) Qus. : What are you doing in Business?
Ans.: Selling the Goods.

3) Qus. : From where are you getting Goods?
Ans.: From other State/Abroad

4) Qus. : What are you getting in Selling Goods?
Ans.: Profit.

5) Qus. : Where you Manufacturing the Goods?
Ans.: Factory.

6) Qus. : Do you have Office / Warehouse/ Factory?
Ans.: Yes

7) Qus. : Do you have Staff?
Ans.: Yes

8) Qus. : Doing business in Millions?
Ans.: Yes

9) Qus. : Are you taking out over 25,000 Cash from Bank?
Ans.: Yes, for Salary.

10) Qus. : Where are you taking your client for Lunch Dinner?
Ans.: Hotel

11) Qus. : Are you going Out of Station for Business?
Ans.: Yes

12) Qus. : Have you taken or given any Service/s?
Ans.: Yes

13) Qus. : How come you got such a Big Amount?
Ans.: Gift on birthday.

14) Qus. : Do you have any Wealth?
Ans.: Yes

15) Qus. : To reduce Tension, for entertainment, where are you going?
Ans.: Cinema or Resort.

16) Qus. : Have you purchased House?
Ans.: Yes

17) Qus. : How you Travel?
Ans.: Bus

18) Qus. : Any Additional Tax?
Ans.: Yes

19) Qus. : Delayed any time Paying Any Tax?
Ans.: Yes
Department activities to increase tax collections

Department activities to increase tax collections

4:00 PM Add Comment
The income tax department is set to act tough on state governments, many of which have been
defaulting on deducting tax at source. The department is planning to allot Tax Deduction Account Number (TAN) to all drawing and disbursing officers of all states and central ministries.

TAN is a unique identification number, which is allotted to people who are deducting or collecting tax at source on behalf of the income tax department. It has to be quoted in all TDS/ TCS returns. As in the case of permanent account numbers (PAN) that helps to keep track of all assessees and their returns, TAN is used to keep a tab on all tax dedicators and deductions. If all
these officers have a TAN, It would be easier to track collections by state governments through TDS.

Tax officials point out that a large number of states have deducted the tax but have not remitted it to the Centre for the past two to three years. Some others meanwhile have not deducted the tax at all from the salaries and pensions of their employees.

The issue was also taken up at the recent income tax chief commissioner’s conference as a part to strengthen the TDS mechanism. While the exact quantum of such defaults by states is difficult to assess, tax officials say it is a recurring problem and needs to be addressed in order to increase collections through TDS.

The income tax department is also mulling several other measures to strengthen the TDS mechanism in states and increase collections. It is planning to appoint more officers in its Commissionerate to supervise deductions and collections under the system. The department may also start training programmes to sensitise the authorized dedicators in the states to comply with law and improve the TDS collections.

Increasing collections from TDS is a key focus area of the department, especially as it has been relying more on voluntary compliance. As a result of the various steps that have been undertaken, TDS collections increased by 51% in 2007-08 to Rs 1,06,700 crore from a mere 2.36% in 2004-05. The total tax collection in the fiscal stood at Rs 3, 14,486 crore. Similarly, till June this year, tax deducted and collected at source has risen at a rate of 50%.
Check Your TDS Deposited Amount Details Here

Check Your TDS Deposited Amount Details Here

12:18 AM Add Comment
TIN facilitates a PAN holder to view its Annual Tax Statement (Form 26AS) online. Form 26AS contains

» details of tax deducted/collected on behalf of the taxpayer by deductors/collectors
» advance tax/self assessment tax/regular assessment tax, etc. deposited by the taxpayers (PAN holders)
Steps for viewing Tax Credit

» 1. Online Registration of PAN by PAN holder
» 2. Verification of identity and authorisation by TIN-Facilitation Centre
» 3. View Tax Credit

Registration & authorisation is a one-time activity. This can happen in two ways:

» a) PAN holder can personally visit any TIN-FC of its choice and get his PAN request authorised; or,
» b) PAN holder can request any TIN-FC to visit him at an address specified by him and get his PAN authorised.
Registration Fee

There is no charge for viewing the Tax Credit online, however, the TIN-FC may charge for authorization of PAN as follows:
» a) TIN-FC will charge Rs.17 (i.e. Rs.15 + service tax) for authorisation of PAN registration request, when the PAN holder personally visits the TIN-FC.
» b) TIN-FC will charge Rs.110 (i.e. Rs.100 + service tax) for authorisation of PAN registration request in those cases where the PAN holder opts for the TIN-FC to visit him.

To Know your TDS deposited details click the link

TDS Deposited
Difference between TDS and TCS

Difference between TDS and TCS

12:18 AM Add Comment
Tax deduction at Source (TDS)

Persons responsible for making payment of Income covered by the scheme of tax deduction is are required to deduct tax at source at the prescribed rates. Tax so deducted should be deposited within the prescribed time. Returns on TDS should be submitted within the specified time.

The income tax is deducted at source on

Interest on Securities
Rent payments
Payments to Contractors and sub contractors
Payment of Commission or brokerage
Payment of fees for Professional/Technical Services
Payment of any income to Non Resident

Tax Collection at Source (TCS)

Tax Collection at Source arises on the part of the seller. The following goods when sold must be subjected to TCS and the taxes collected thereon must be remitted into department's accounts as done in the case of TDS

Alcoholic liquor for human consumption and Tendu leaves
Timber obtained under a Forest Lease
Timber obtained by any mode other than under a Forest Lease
Any other Forest produce not being Timber or Tendu Leaves
Scrap (waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons
Definition Of PROFESSIONALS Expanded By CBDT

Definition Of PROFESSIONALS Expanded By CBDT

3:05 PM Add Comment
The Central Board of Direct Taxes (CBDT) expanded the scope of professional services to cover sportspersons, umpires and referees, making them liable for a higher tax deduction at source (TDS) at the rate of 10% against 1-2%.

Sportspersons who are amateurs and do not play for commercial gain are exempted from the ambit of this tax.According to the notification, the CBDT has categorised services rendered by sportspersons, umpires and referees, coaches and trainers, team physicians and physiotherapists, event managers, commentators, anchors and sports columnists as professional services.

The professionals were covered by Section 194C of the Income-Tax Act, which made them eligible for a lower TDS rate of 1-2%. With this notification, they would now be covered under 194J of the I-T Act.
Income Tax Return After Due Date-Anlysis

Income Tax Return After Due Date-Anlysis

3:45 PM Add Comment
Last Month was a very busy one for Income tax offices, as Offices were overcrowded bu tax payers due to last date of Filing of income tax returns for non audit cases ,specially persons who has earned salary income ,and department has to open special counter at various places to cop up the rush for filing of returns,Due date to file the return for FY 2007-08 ,for different category are :

In case of person who are not liable to get their accounts audited is 31.07.2008
In case of person who liable to get their accounts audit is 30.09.2008
In first case person who has earned income from salary ,pension, interest income ,capital gain , house property and person owning small business and not liable to get their accounts audited are covered.

but are you aware of ,what will be happened if person fails to file the return on time ,what will be the penalty .........

any guesses..........

In fact there is no penalty as such for this fault ,absolutely no penalty But this is the fact .Specific penalty for late filing of return is prescribed u/s 271F which is briefed here under

"if a person failure to furnish return of income as required by section 139 before the end of relevant assessment year ,the assessing officer may impose a penalty of Rs 5000/-"

so this section says end of relevant assessment year ,as for previous year 2007-08 , assessment year is 2008-09 and its end on 31.03.2009 ,means there will be no liability for late filing of income tax return up to 31.03.2009 and after that assessing officer can impose a penalty of 5000,and that is also his power which he may or may not exercise.

Now you would like to know why people are so much worried about the last date ,the reason is that as last date has been linked with various other section of the income tax act ,so it is significant in that manner .

I have given some sections linked with the due date of the Income tax return.

Impact of late filing of Income tax return

Interest u/s 234A:If there is tax due after deducting advance tax ,TDS and self assessment tax than interest will be applicable @1% per month and part thereof up to the date of filing of the return besides interest applicable u/s 234B or 234C.Means this interest is applicable only if there is any tax payable in your return .

Loss of Interest on refund:You may loose interest on refund u/s 244A as delay in filing is attributable to assessee for the period by which you have filed late return.

Audit Report:Person who are liable to get their accounts audited should get the audit report on or before the due date of filing return i.e 30.09.2008.

Revised return :Late /belated return can not be revised .
Not able to carry forward the losses under various heads:you are not able to carry forward following type of losses if file return after due date
Speculation loss
business loss excluding loss due to unabsorbed depreciation and capital exp on scientific research
short term capital loss
long term capital loss
loss due to owning and maint. of horse races
However there is no impact on following type of losses even if return is furnished after the due date

loss from house property
business loss on account of unabsorbed depreciation and capital expenditure on scientific research.
Person who can afford to file late return

If you have

deposited your all tax or due taxes has been deducted by your employer and nothing is due or
you are not claiming a Major amount as refund or
you have no losses to be carried forward
then you can fill return up to the end of the assessment year ie 31.03.2009 without any penalty.

Person who should file return on time.

If you have

balance tax to be deposited or short fall of tax or
huge amount of refund due to you or
you have losses to be carried forwarded as explained above(though delay can be condoned as per circular 8/2001 DT 16.5.2001 on fulfilling of certain condition)
so the persons not able to file the return on time for FY 2007-08 can now file their returns by 31.03.2009 without any penalty,file Now

Source - Popular Forums
205A. Unpaid dividend to be transferred to special dividend account

205A. Unpaid dividend to be transferred to special dividend account

3:02 PM Add Comment
Unpaid dividend to be transferred to special dividend account

(1) Where, after the commencement of the Companies (Amendment) Act, 1974, a dividend has been declared by a company but has not been paid, 2[or claimed], within 3[thirty days] from the date of the declaration, to any shareholder entitled to the payment of the dividend, the company shall, within seven days from the date of expiry of the said period of 3[thirty days], transfer the total amount of dividend which remains unpaid 4[or unclaimed] within the said period of 3[thirty days], to a special account to be opened by the company in that behalf in any scheduled bank, to be called "Unpaid Dividend Account of .................Company Limited/ Company (Private) Limited".
[Explanation.- In this sub-section, the expression "dividend which remains unpaid" means any dividend the warrant in respect thereof has not been encashed or which has otherwise not been paid or claimed.]
(2) Where the whole or any part of any dividend, declared by a company before the commencement of the Companies (Amendment) Act, 1974, remains unpaid at such commencement, the company shall within a period of six months from such commencement, transfer such unpaid amount to the account referred to in sub-section (1).

(3) Where, owing to inadequacy or absence of profits in any year, any company proposes to declare dividend out of the accumulated profits earned by the company in previous years and transferred by it to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be made by the Central Government in this behalf, and, where any such declaration is not in accordance with such rules, such declaration shall not be made except with the previous approval of the Central Government.

(4) If the default is made in transferring the total amount referred to in sub-section (1) or any part thereof to the unpaid dividend account of the concerned company, the company shall pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of twelve per cent per annum and the interest accruing on such amount shall ensure to the benefit of the members of the company, in proportion to the amount remaining unpaid to them.

6[(5) Any money transferred to the unpaid dividend account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company to the Fund established under sub-section (1) of section 205C.]

(6) The company shall, when making any transfer under sub-section (5) to the 7[Fund established under section 205C] any unpaid or unclaimed dividend, furnish 8[to such authority or committee as the Central Government may appoint] in this behalf a statement in the prescribed form setting forth in respect of all sums included in such transfer, the nature of the sums, the names and last known addresses of the persons entitled to receive the sum, the amount to which each person is entitled and the nature of his claim thereto, and such other particulars as may be prescribed.
(7) The company shall be entitled to a receipt from the authority or committee under sub-section (4) of section 205C for any money transferred by it to the Fund and such a receipt shall be an effectual discharge of the company in respect thereof.]
(8) If a company fails to comply with any of the requirements of this section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to 10[five thousand rupees] for every day during which the failure continues.]
Tax implications of foreign house ( Sec - 54)

Tax implications of foreign house ( Sec - 54)

3:00 PM Add Comment
Conceptually, there is no ground to give Section 54 benefit to a person who acquires a house property or constructs it in a foreign country after selling a house in India

In an article published in a tax journal, an advocate and tax consultant from Ahmedabad had expressed the view that exemption from capital gains can be availed of under Sections 54 and 54F of the Income-Tax Act, 1961 even when investment in house property is made abroad, say, in London.

Location issue

The reasoning is that neither Section 54 nor Section 54F prescribes any restriction in regard to the location, where the investment in the residential house should to be made.
Thus, the house, to be purchased or constructed by the taxpayer for getting tax exemption on long-term capital gains (LTCG) investment can be either in India or overseas.
The view expressed has also been supported by the fact that the Foreign Exchange Management Act, 1999, having liberalised remittances by resident Indians for their annual overseas investment up to $1,00,000 and with the I-T Act enabling tax exemption of LTCG in case of an investment made in either the purchase or construction of a residential house, one can plan to sell one’s land and invest funds outside India so as to enjoy tax exemption. The view expressed does not seem to be correct for the following reasons:
Section 54 provides for exemption in respect of LTCG arising from the transfer of a residential house. This exemption is available only to an individual or a HUF and is subject to fulfilment of the under-mentioned conditions:
The capital gain should arise from the transfer of long-term capital asset, being buildings or lands appurtenant thereto, being a residential house, income wherefrom is assessable under the head ‘Income from house property’.
The transferor shall be an individual or an HUF.
The transferor assessee should have purchased a residential house a year before or two years after the date of transfer; or, in the alternative, the assessee should construct a residential house within three years from the date of the transfer of the original house.
Both Sections 54 and 54F require investment of the amount of capital gain only and not the amount of entire consideration or the net consideration flowing as a result of transfer of the long-term capital asset.
In view of this, the issue is whether the capital gain arising from the transfer of the residential house should be invested in India or whether exemption can be claimed even if the property is acquired or constructed in a foreign country.
The argument is that in both the sections, there is no requirement that the residential house, to claim exemption, should be acquired or constructed only in India.

Untenable argument

The argument does not seem tenable. For claming exemption, property is to be acquired in India. The Government foregoes revenue to achieve some avowed objective for the good of the country.
Section 54 exemption for capital gain is intended to give a boost to the construction of residential houses in the country and this objective will not be achieved if the property is acquired or constructed in a foreign country.
Hence, conceptually, there is no ground to give the benefit of Section 54 to a person, who acquires a house property or constructs it in a foreign country after selling a house in India.
This view gets support from the Supreme Court decision pronounced on May 9, 2008, in the American Hotel & Lodging Association Educational Institute vs CBDT (2008 170 Taxman 306 SC) case.
In this case, the assessee, a branch office of a non-profit organisation in the US carrying on educational activities, was enjoying tax exemption in the US.
It had been set up for carrying on educational activities of the head-office for the convenience of Indian students and institutions and the assessee used to collect charges for course materials, etc., to be supplied to them, on behalf of the head-office.
It made an application requesting for approval for purpose of Section 10(23C)(vi). This was rejected on the ground that the assessee had not applied its accumulated income for education in India.
‘In India’
The assessee’s case was that the third proviso to Section 10(23C)(vi) does not mention that income generated is required to be applied in India and, in fact, words ‘in India’ are totally missing and the Revenue had unnecessarily imported these into the third proviso to Section 10(23C)((vi).
The High Court had decided that the words ‘in India’ have necessarily to be read with the third proviso to Section 10(23C)(vi) to make it workable. The Supreme Court has decided that the plain words of the third proviso do not require application of income to be in India.
But it should not be understood to mean that the applicant has not to impart educational activities in India. If the applicant wants exemption under Section 10(23C)(vi) it has to impart education in India and only then it would be entitled to claim initial approval under that section.
That is the reason for saying that the ‘non-profit’ qualification has to be tested against Indian activities. The consideration is that impartation of education must be in India if the applicant desires exemption under Section 10(23C)(vi).
On this logic, for claiming exemption under Sections 54 and 54F, construction/acquisition of a house in India is a necessary condition. Reference to FEMA and its liberalisation has no relevance in the context of exemption of capital gains under the I-T Act.

Courtesy - T. N. Pandey (www.thehindubusinessline.com)
Certain Tax Terms & Meaning

Certain Tax Terms & Meaning

3:33 PM Add Comment
Service tax on construction

The construction industry is growing rapidly, mirroring the overall growth in the economy. Services in relation to construction, repair or reconditioning of commercial and residential complexes fall within the ambit of service tax.

The Budget 2007 brought works contract services under the service tax net, and provided for levy of service tax on all integrated construction services and turnkey projects where VAT is also payable. These services are already covered under other specific taxable services and their scope has not been amended till date. This has created an ambiguity in classification of construction services as they can be classified as both ‘construction of commercial property/ residential complex service’ or ‘work’s contract service’.

A circular issued recently prohibits transition in respect of ongoing contracts from an earlier classification to Works Contract Services. For all future contracts, a service provider has the option to utilise a composition scheme or abatement in the taxable value when the services relate to construction.
used in the course of providing renting of commercial property services.

“The ambiguity in the classification of construction services into one of the categories needs to be resolved. There should be only one service under which works contracts should be classified with no ambiguity. The credit system also needs to be streamlined with clarity on availability of credits on input and input services under various schemes,” says Bipin Sapra, Associate Director.

“The clarification needs to be revisited as construction services are an eligible input for the renting of immovable property as they are used in the setting up of the premise from which the service is provided.”

Securities Transaction Tax

In 2004, the Finance Minister, P. Chidambaram, introduced Securities Transaction Tax (STT). Every transaction in securities entered into in a recognised stock exchange in India attracts STT, including transactions in stock, index options and futures.

At present, STT ranges between 0.017 per cent to 0.25 per cent and is leviable on taxable securities transactions in equity shares, derivatives and units. The rate of STT varies in case of derivatives, futures, and other taxable securities transactions. The responsibility to collect STT from the purchaser or seller vests in the stock exchange or a mutual fund. Rebate in respect of STT is also available against income-tax where income is charged to tax as business income.

STT has been a tool to collect taxes and counter speculation by operators without affecting long-term investors. The surge in stock markets has earned the revenue department a 57 per cent rise in STT collections to Rs 5,895 crore up to December 2007 compared with approximately Rs 2,908 crore in the same period in the last fiscal.

STT is currently levied on all transactions in the secondary market effected through the stock exchange. Corporates have been coming out with buyback and open offers which are not subject to STT since such transactions are executed outside a recognised stock exchange. Such transactions have tax implications affecting the sale transaction. The Budget could seek to expand the ambit of STT to such off-market transactions in listed securities.

“The securities lending scheme permits entities to borrow and lend securities to facilitate short selling. Although the definition of a taxable securities transaction for the purpose of levy of STT refers only to a purchase and sale of securities on a recognised stock exchange (which a lending and borrowing is not) it would be useful if the Budget confirms this point,” says Hiresh Wadhwani, Partner.

Venture Capital Funds

Venture capital funds (VCFs) provide an avenue to investors to participate in a wider range of investments than may be feasible for an individual investor. With a view to encouraging the setting up of pooled vehicles for risk capital financing which can then be channelised into companies in need of capital, the Finance Act, 2000, accorded a pass-through status for income earned by SEBI registered VCFs subject to meeting certain conditions.

This tax treatment of VCFs was consistent with the globally accepted approach for taxation of investment vehicles designed to avoid double taxation of income, that is, to ensure that income is taxed only once in the hands of the investors.

Last year’s Budget restricted the pass-through status to income earned by VCFs from investments in nine specified sectors. In practice, the amendment should not impact a vast majority of VCFs set up as trusts which in any case enjoy a pass-through status under the general provisions of the Act subject to the trust qualifying as a determinate trust and its income not being regarded as business income.

The amendments will also not have any impact on foreign VCFs which are generally set up in tax favoured jurisdictions - for example, Mauritius.

“However, there is a lack of clarity on the practical application by the tax authorities of the above general provisions for taxation of VCF trusts. It would therefore be necessary to either reinstate the pass-through status to VCFs generally on all income earned or alternatively clarify that VCFs would be liable to pay tax equal to the aggregate tax that would have been paid by the investors individually,” says Hiresh Wadhwani, Partner, Financial Services.

“Towards this, it would be necessary that the law be suitably amended to provide the conditions for qualifying a VCF trust as a determinate trust keeping in perspective the manner in which VCF trusts are structured.”


Banking Cash Transaction Tax (BCTT) was introduced as an anti-tax avoidance measure with an objective of providing a mechanism to check unaccounted money through a trail of cash withdrawal transactions.

BCTT is chargeable on cash withdrawn from an account in any scheduled bank (other than savings account) or cash received on encashment of term deposits from any scheduled bank where the cash withdrawn/received exceeds Rs 50,000 per day for an account held by an individual or HUF and Rs 1,00,000 per day for other account holders. Rate of BCTT is 0.1 per cent of cash withdrawn/received.

There have been serious objections against BCTT, especially from the business entities which are required to withdraw large sums of cash for genuine purposes, for example, payment of cash salaries, stamp duty and other regular business expenses. BCTT has also invited serious concerns from banks since it has added considerable administrative burden on them to maintain the records of collection and payment of tax, filing returns, undergoing assessment proceedings, to name a few instances.

The Finance Minister has stated that BCTT has proved to be a useful tool to track unaccounted monies since it has led the revenue authorities to many money laundering and hawala transactions.

“BCTT is not a revenue generating levy which is clear from the fact that it constitutes only about 0.2 per cent of total direct tax collections so far. It was intended to be a temporary measure until other systems to track black money and money laundering cases are in place,” Sameer Gupta, Partner.

“Under the income-tax laws/money laundering regulations banks are obligated to furnish comprehensive information on the cash transactions. Therefore, it would be more efficient to obtain the relevant data on cash withdrawals through such information collation framework rather than by administering a separate levy like BCTT.”

Customs Duty - Shipping Industry

The shipping industry in India has traditionally enjoyed a favourable Customs duty regime. In the last decade or so not only have the peak Customs duty rates steadily come down to nil but also the list of items relating to the shipping industry which are now subject to nil rate of Customs duty has increased to include almost everything of relevance.

Not only ships but also vessels of various other kinds, such as barges, tugs, pusher crafts and dredgers and the spare parts of the same, are also now exempted from levy of Customs duty.

However, notwithstanding a favourable Customs duty regime, there are certain long-standing issues affecting the industry. The Government would do well to address the same in the upcoming Budget. World over, the stores carried by ships are not subjected to any kind of domestic taxes. The rationale behind this exemption being that such supplies tantamount to exports as the same are consumed on ships on high seas and thus should be zero rated. However, in India the stores, including edibles, fuel etc., are still subject to levy of domestic taxes such as VAT and excise, etc. This increases the cost of services provided by the shipping industry in India and puts them in a disadvantageous position vis-À-vis their foreign counterparts.

Although the parts required for repair of ships are exempt from levy of Customs duty, the ship repair equipment itself imported by the shipping companies is still subjected to Customs duty. This increases the cost of repairs and dilutes the advantage of cheap labour cost in Indian ship repair yards.

“An impetus for the shipping sector could be operationalisation of SEZs for shipping companies. This would require certain policy decisions by the Government for allotment of additional land at the ports. This move would make the services of the shipping companies including ship making and repairing very competitive,” says Manu Verma, Associate Director.

“The industry has also been demanding simplification of port procedures once a ship enters the port. The present procedure of filing voluminous documentation should be replaced by a self-declaration procedure so that the unloading operations can begin immediately without having to wait for clearance from the Customs authorities.

Excise duty on automotive sector

Typically, the Government would like to keep the auto industry robust because it also affects transportation of goods in the country. As part of the rationalisation of duty rates, the Government has brought down the excise duty rates from a whopping 40 per cent in 2001-2002 to 16/24 per cent in 2007-08.

The last time when the Finance Minister intervened in the industry was in the Budget two years ago when he cut the excise duty on small cars to 16 per cent.

Also with effect from June 1, 2006, MRP-based valuation has been introduced for automobile parts and spare parts. The present abatement of 33.5 per cent on MRP is allowed for calculation of excise duty.

At present, passenger vehicle (other than small car) attracts excise duty at the ad valorem rate of 24 per cent.

Two and three wheelers are liable to 16 per cent excise duty. Maxi cabs with seating capacity up to 13 passengers and motor vehicles for transportation of goods with petrol engine are liable to excise duty of 24 per cent

Additionally, 1 per cent NCCD (National Calamity Contingent Duty) which was introduced in March 1, 2001, would also apply. Also, while introducing NCCD, it was initially planned only for one year. Because of this, a manufacturer has to maintain separate accounts. NCCD levy increases the product cost by 1 per cent with multiple tax rates.

“The expectation of the automobile industry from Budget 2008 is more on rationalisation of duty and tax rates and less on procedural matters. The demand of the industry would be to eliminate tax inefficiencies on the input side and also lower duty/tax rate on some category of finished vehicle,” says B. Sriram, Associate Director. “With competitive pricing being the mantra at least in lower segment of this industry, cascading taxes would not help. On the auto ancillary front, competition is imported from outside the country through reduced Customs duty generally and also through specific Free Trade Agreement with South-East Asian countries. The demand of the industry would be for a level-playing field.”

Technology - Service Tax

With the liberalisation of the Indian economy and the consequential growth in the services sector, the Union Government introduced the levy of ‘service tax’ in 1994, to claim its share of the “services pie”. An estimated Rs 40,000 crore in service tax revenue is expected to be collected in the current fiscal year.

The growth of the Indian IT/ITES sector over the years has been phenomenal with India emerging as a leading player in the “offshore services” space and contributing significant foreign exchange to the exchequer. Companies in the IT sector are engaged in providing a wide range of services, key amongst which are software engineering and related IT services.

The Government recognised the contribution of this sector to the economy and excluded computer software engineering and related IT services from the purview of service tax. However, the Export of Services Rules only provide for rebate/refund of service tax paid on input services used for export of “taxable” services.

The IT sector is facing challenges on availability of Cenvat credit and consequent rebate/refund of taxes paid on input services consumed for export of such IT services which are treated as “non-taxable”. This, coupled with a strong appreciation of the rupee against the dollar, has resulted in cost escalations for the industry at one end and a disparity vis-À-vis the benefit available to other export oriented industries (including ITES Sector) eligible for a refund/rebate of input service tax, on the other.

“Given the evolving nature of the service tax legislation and nascent provisions with regard export of services, Cenvat credit, rebate/refund of taxes, it is only reasonable to expect that the Government should appreciate the need for rationalisation of the legislative framework with specific emphasis on the IT services sector,” says Vivek Pachisia, Senior Manager - Indirect Tax.

“The coming Budget should be focused on clearing up the anomalies with regard to availability of Cenvat credit and rebate/refund of input taxes for all service exporters, including the IT sector, which, besides providing relief to the IT Sector would also align the incentive with the stated objective of export promotion.

Dividend Distribution Tax

Dividend distribution Tax (DDT) on mutual funds, which was introduced by the Finance Act, 1999 is here to stay as it has become a sizeable revenue earner for the exchequer.

At present, DDT is levied only on income funds - at the rate of 20 per cent for distribution to a corporate and 12.50 per cent for distribution to a non-corporate. To promote a safer vehicle for investment in equities and keeping in mind the fact that equity dividends are subject to DDT, the law provides for exemption from DDT for equity funds.

The Finance Act, 2007 had brought about a further distinction between liquid fund/money market mutual funds vis-À-vis other types of income funds, and a higher DDT rate of 25 per cent was introduced on such funds, apparently with a view to check the tax arbitrage available to persons with short-term surpluses investing in such funds.

There are no specific provisions in law relating to taxation of Fund of Fund (FoF) schemes - a unique product from the mutual fund industry which seeks to achieve further risk diversification by investing in schemes of various fund houses. In the absence of specific provisions, such schemes also face the brunt of DDT even when the FoF is invested largely in equity funds.

According to R Anand, Partner, “Introduction of different DDT rates depending on the characteristics of the income scheme has resulted in fiscally-introduced differentiation within various categories of income funds, which is avoidable. There is therefore a need to restore parity in DDT rate for all types of non-equity funds.”

“Further, taxing of FoF schemes which in-turn invest in other equity schemes is against the intention of sparing equity investments from DDT. It is therefore appropriate that FoFs that satisfy investment criteria of being ultimately invested in equities, be brought on a par with normal equity schemes of mutual fund and extend the exemption from DDT to such schemes.”

FBT - impact on technology companies

The Government introduced the Fringe Benefit Tax (FBT) regulations in the Finance Act, 2005. The rationale for the levy was to tax collective benefits enjoyed by the employees; such benefits were otherwise not subject to tax.

The FBT legislation has been extended to all categories of employers (including foreign employers), barring a few approved trusts, funds, institutions, hospital and registered political parties. FBT is payable on the value of the fringe benefits provided or deemed to have been provided by an employer to his employees during the relevant financial year at the rate of 30 per cent (plus applicable surcharge and cess).

Considering the difficulties faced by the employers in understanding this legislation, the Central Board of Direct Taxes issued a circular in August 2005 in the form of Questions and Answers, and addressing 107 queries.

With effect from financial year 2007-08, the Government has included allotment of shares to employees under Employee Stock Option Plans (ESOPs), within the ambit of FBT. To provide clarity on the applicability of ESOPs, the Government issued another circular in December 2007.

FBT collections have increased by 64.79 per cent to Rs 5,121 crore till January 15, 2008, in the current fiscal year against Rs 3,108 crore during the same period last fiscal.

“The industry associations have sought withdrawal of FBT regulations altogether. Considering the significant contribution of this levy to the exchequer, it is unlikely that the Government will heed to this request,” says Rajesh S., Director.

“There are high expectations that the Government may withdraw ESOPs from the FBT levy to provide some relief to IT and other export-oriented companies after considering the impact of a) rupee appreciation, b) the sub-prime crisis and potential economic recession in the US; and c) the inflating cost structure in technology and other export-oriented industries.”

According to Rajesh, such a measure will also indirectly benefit the employees of the companies as the FBT costs are recovered from them in most situations.

MAT and technology industry

The Indian tax law provides for Minimum Alternate Tax (MAT) to be paid by companies on the basis of profits disclosed in the financial statements. Companies must pay 10 per cent (plus applicable surcharge and cess) of book profits as tax, if the tax payable as per regular tax provisions is less than 10 per cent of its book profits. Book profits for this purpose are computed by making prescribed adjustments to the net profit disclosed by the companies in their financial statements.

Finance Act, 2007 has extended the applicability of MAT to companies enjoying tax holiday under Section 10A/10B of the Income-Tax Act, 1961. Typically these entities are those that have set up units under the Software Technology Parks (STP) scheme or Export Oriented Units (EOUs), which currently enjoy a tax holiday till March 2009.

MAT paid in excess of the normal tax payable by a company for a particular year can be carried forward as credit to be offset against future income tax payable under the normal provisions of Act. The carry forward of such MAT credit is at present restricted to seven years following the year in which the credit arises.

“With a strengthening rupee and a global slowdown, the software and services export industry is facing pressure on margins, further aggravated by increasing costs. The impact will be more on the SME segment,” says Jayesh Sanghvi, Patner. “It is thus expected that the tax holiday benefit will be extended beyond 2009. It remains to be seen whether the same would be made co-terminus with the SEZ benefits that extend for 15 years.”

According to Sanghvi, While MAT on all companies can be justified based on horizontal equity, the present STP/EOUs should also be spared from the impact of MAT to ensure a level-playing field with SEZ units. At the least MAT rate should be reduced to the previous rate of 7.5 per cent.

Stamp Duty and real estate sector

The growth story thus far in Indian real estate has been told despite the impediment of high stamp duty rates, which have thwarted the creation of a sound and robust secondary property market. Stamp duty levies abound in the double digits in some States (not to mention stark differences in the scope of the levy and applicable rates across India), in sharp contrast with the rates in developed markets such as Singapore and Europe, where the levies are typically between 1-3 per cent.

Incidence of duty at multiple stages on the same property (firstly on acquisition of land and subsequently, on the sale of developed units or lease of property) add to property prices and rentals, which are already stretching beyond the purchasing power of the larger masses.

Court schemes, such as amalgamations and demergers, and holding company to subsidiary company transfers are now taxed in several States, annulling even the limited exemptions that were possible earlier under stamp law.

The current scenario is, therefore, quite discouraging, from the perspective of the stamp duty levy. The next target of this transaction cost shall be REITs, which may fail ab initio, if exemptions from this levy are not granted.

“How much the Budget can do to provide relief from stamp duty is questionable, given the empowerment the States have under the Constitution on this subject. What will help though are initiatives from the Centre to build consensus among States on lowering/rationalisation of stamp duty rates, credit mechanisms and exemptions for REITs,” says Ajit Krishnan, Tax Partner.

“The experience on VAT should help in ‘actioning’ these and some of the recommendations of the National Housing and Habitat policy, which have been gathering dust so far. Only then will the creative but risky structures and cash dealings, now typical of the sector, be eliminated.

Courtesy - sify
Tuition and Fees Tax Deduction

Tuition and Fees Tax Deduction

1:43 PM Add Comment
You may deduct up to $3,000 of qualifying higher education tuition and fees as long as your modified adjusted gross income does not exceed $65,000 for a single filer, or $130,000 for a joint filer. However, if your child also qualified for the Lifetime Learning Credit or the Hope Scholarship, you must choose either tuition and fees deduction or the lifetime learning/Hope scholarship deduction. You cannot deduct both.
IRA Deductions

IRA Deductions

1:42 PM Add Comment
An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. The most you can contribute to your traditional IRA for 2003 is $3,000. For 2003, the $3,000 is increased to $3,500 if you are 50 or older.

You can only make this deduction if your adjusted gross income falls under a certain level: $40,000 on a single or head of household return, $60,000 if you are married filing jointly.

You can also be penalized for withdrawing from your IRA if you are under 59½ years old.
you can save up to Rs 44,000 Tax a year

you can save up to Rs 44,000 Tax a year

4:09 PM Add Comment
From the point of retail investors the budget is good; he has given tremendous relief for income tax.

Salaried professionals: A male earning up to Rs 5 lakh a year will save Rs 44,000 by way of income tax. Now, he will pay only Rs 55,000 by way of income tax, which means that the effective tax rate is down to only 11 per cent. That means more money of up to Rs 44,000 per annum is available for investment.

For women, the difference is Rs 43,500 per annum. For senior citizens it is up to Rs 39,500 per annum. That will be a great saving for working professionals.

Also, if you buy medical insurance for your parents, you get an additional relief of Rs 15,000.

Short term capital tax: People will be forced to hold on to their shares for at least a year because short term capital gain has become 15 per cent. That is a positive disincentive to sell within in one year. If there is less selling pressure, the stock market will be forced to improve.

Stock market advice: One thing bothering everyone is this Rs 60,000 crore that will cost the exchequer. If banks are not reimbursed by the Finance Minister, than they (the banks) will take a hit and therefore banking stocks may fall. We have to wait and watch.

Wait and watch. Ultimately the stock markets will be driven by global trends. If markets fall in US, Asia etc, it will affect us. Investors must be cautious.

Senior citizens: Reverse mortgage loan scheme -- if you have a house, you can give your house (mortgage your house to the bank while still living in it) and take a loan. The money you receive will not be taxable. It can become your regular income.

Consumers gain: Two-wheelers, small cars, tea and coffee and other small things, will get cheaper.

Last words
: No googlys! But I did not expect him to give so much relief on the personal income tax. It was a substantial relief to the middle class, to both the self-employed and to professionals.

Source : MoneyControl
Vodafone challenges Indian tax law

Vodafone challenges Indian tax law

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Vodafone Challenges US$2bn Indian Tax Bill

London, June 23:
British telecom major Vodafone is challenging in the Bombay High Court a change in India's tax laws which have been applied retrospectively to its 11.1 billion dollar purchase of a controlling stake in Hutchison Essar.

Vodafone said in a statement on Friday that it has submitted an amended writ petition challenging the "constitutionality of the retrospective amendment of the changed tax law."

A legal hearing in the Bombay High Court is due to restart on Monday (June 23) to decide on the legality of a 2 billion dollars tax bill based on the purchase of the Hutchison stake, The Independent reported.

If the tax department can show that the India based Vodafone-Essar acted as an "agent" of Vodafone in its overseas purchase (arranged via Mauritius) of Hutchison's shares in Hutchison-Essar, then it may be possible that Vodafone-Essar could be held liable for the tax demand.

When Vodafone bought a controlling stake in Hutchison Essar from the Hong Kong-based Hutchison conglomerate in May 2007, the UK group's advisors confirmed that because the deal was between two foreign companies, no tax was due to the Indian authorities. But the Indian Government does not agree, and the row is set to continue.

This week's hearing will decide on the validity of a Vodafone writ seeking an injunction against the tax authority's investigation of the deal. Whichever way the court rules, and a decision is not expected for a number of weeks, it is likely that the losing side will lodge an appeal with the Supreme Court.

The case has major implications for all foreign companies pursuing Indian assets. Vodafone's argument, and the basis of its writ, is that the company cannot owe tax on the deal because the transfer of shares took place between a Dutch group owned by Vodafone and a Hutchison company registered in the Cayman Islands, both of which are outside India's jurisdiction.

But the government says that it does have a capital gains claim because the assets are based on Indian soil.

The dispute started last year, and was complicated further by a retrospective change to the Indian tax laws in February's Budget.

Source : Popular New sites