INDIA BUSINESS WORLD - NOVEMBER 16^th - NOVEMBER 30^th - 2007

AUTHORITY FOR ADVANCE RULINGS PAVES WAY FOR CAP GAINS TAX ON VODAFONE

In a decision that may boost the income-tax department's chances of bringing the $11.1-billion deal between Hutchison International and Vodafone into the tax net, the Authority for Advance Rulings (AAR) has held in a similar case that transaction of Indian shares between two foreign entities is liable for capital gains tax in the country. AAR is a quasi-judicial authority deciding on tax disputes.

AAR's ruling pertains to dealing of shares in the Hyderabad-based Trinity Corporation. In this case, the buyer and seller of Trinity shares were both US entities. AAR ruled that the buyer of the shares will be taken as an `agent' under Section 163 of the Income-Tax Act. It also ruled that the onus of TDS is also on the buyer under Section 195 of the Act.

In other words, AAR ruled that the buyer of the shares is liable to pay capital gains tax on the transfer of shares of an Indian company even if the transaction is offshore and between two non-residents.

The decision, though binding only on the case that came up before it, has persuasive value on similar cases. Non-residents are charged long-term capital gains at the rate of 20% for off-market transactions. AAR has upheld the I-T department's stand on the ground that since the capital gains are generated in India, they are liable to be taxed here.