The Bombay High Court’s ruling in favour of Vodafone India on whether transaction tax is applicable on capital that flows in from the mother company via a share issue has been widely welcomed. The income-tax department had imposed an additional Rs 3,200 crore on Vodafone’s taxable income for two years from 2009-10 on the grounds that it underpriced its rights shares issued to Vodafone Group Plc.
Vodafone issued these shares at around Rs 8,000 per share whereas the taxmen had determined the price at Rs 53,000 per share. Vodafone had challenged the tax department, saying the transaction was not taxable and that it cannot use the transfer pricing law in this case, and the high court has upheld this.
The judgement has been hailed by Corporate India saying it has solved a troublesome issue that was a dampner on foreign investors. It is, however, a major setback for the tax department, as it has imposed this tax on many firms like Shell, Nokia and IBM, amounting to over Rs 30,000 crore.
It seems strange the I-T department is so way off the mark if one goes by this ruling. India Inc hopes that as the Modi government has spoken out against “tax terrorism”, the department may not appeal.
