In the budget proposals of 2012 an explanation has been inserted in Section 2(14) i.e. the definition of “Capital Asset” to include “any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever” as a capital asset. So any sale of rights in relation to an Indian company including rights of management or control is now taxable in Income tax under the head capital gains.
Similar amendments have also been made in definition of transfer (Section 2(47)) by inserting an explanation with retrospective effect notwithstanding if the rights are held by any company incorporated outside India.
How would it effect the Vodafone Tax Case.
The Indian Government has a tendency to overrule the judgments of Honorable Supreme Court in watershed cases through retrospective amendments. The Honorable Supreme Court has itself noted this tendency in bringing retrospective amendment and causing hardship to the litigants and the same maybe even voilative of constitutions rights (more on this here). The recent judgement which caused embarrassment to the government is the Vodafone Tax Case. The government has inserted an explanation stating that any rights in a Indian company including right to manage and control is a capital asset and has always been.
In view of this insertion the sale of shares of Hutchison Essar by a Mauritus based company to vodafone now becomes taxable in India and Vodafone and other companies like it would be required to pay tax to the government either in form not deducting withholding tax or capital gain tax.
So once again the Honorable Supreme Court has been overruled with a retrospective amendment.