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Unit 13: Tax and Cost Audit

Notes
Impact
Vodafone raises pertinent questions on the issue of taxation of non-resident entities. The
judgment will have direct impact on transactions of major acquisitions like SABMiller-
Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa
Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to pay tax
in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from
$6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability
could range between $868 million and $1.1 billion. The judgment would definitely throw
a cautious note to major investors and M&As in India; however, it does not have that great
an impact to curtail the investment flow to an emerging destination like India. The judicial
propriety of the case is still to be settled when the matter comes for final stages in the
Supreme Court. Going by the events in the lower courts, the Supreme Court is unlikely to
disturb the Bombay High Court ruling.
The global community is keenly watching the current trends happening in the Indian
subcontinent, especially since it has become an emerging player at the socio-economic
and political levels. United Nations Conference on Trade and Development (UNCTAD)
has reported that India is set to dislodge the US by December 2012 to become the second
best destination for FDIs, the major component of which is M&As. India is also set to
revamp its taxations norms with significant changes at the regulatory level. The proposed
Direct Tax Code contains key provisions, which will have a major impact on investments
5
in India . India has improved its rankings in the WB ‘Doing Business’ Report on the
number of regulatory changes taken in the existing year. This shows that the country is set
to make a global footprint by branding itself as a ‘Must Invest’ destination.
The Vodafone tax case has given India the opportunity to create a model for other countries,
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which follow source-based taxation principles . It is an opportune time to bask in the
glory of India, which is said to have had one third share of the world market in ancient
times, as pointed out by economist Amartya Sen in his book The Argumentative Indian.
Let’s hope that we can revive the ‘Real India’ soon.
Notes:
1. Section 201 of the Act broadly provides that any person (referred to in Section 200 of
the Act), and in cases referred to in Section 194, the principal officer and the relevant
company, who does not deduct the whole or any part of the tax, or after deducting
fails to pay the tax as required by or under the Act, he or it shall, without prejudice
to any other consequences which he or it may incur, be deemed to be an ‘assessee in
default’ in respect of the tax.
2. Section 5(2) enunciates that the income of a non-resident from whatever source
derived is included in the total income if (i) it is received in India; (ii) deemed to be
received in India; (iii) accrues in India; (iv) deemed to accrue in India; (v) arises in
India; or (vi) deemed to arise in India.
3. Section 9(1) explains the circumstances in which income is deemed to accrue or arise
in India and includes all income accruing or arising in India, whether directly or
indirectly (a) through or from any business connection in India; or (b) through or
from any property in India; or (c) through or from any asset or source of income in
India; or (d) through the transfer of a capital asset situated in India.
4. Section 195 provides for deduction for tax at source upon a payment to a non-
resident or foreign company

Contd....

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