Applying GST to the Tata-Docomo transaction sends wrong signal
The Centre’s revenues are not growing fast enough, and that’s perhaps leading to more aggressive action by taxmen in recent months.
Recently, the GST authorities issued a notice to Tata Sons on its payout to NTT Docomo under an arbitration award. Docomo, Tata’s erstwhile partner, had written in an exit clause at a pre-determined price, that if certain operating conditions weren’t met, Tata Sons either had to find a buyer for Docomo’s stake or buy out the stake itself.
When Docomo initially triggered the clause in the agreement, Tata Sons demurred as it would need special permission under foreign exchange laws. After a period of legal wrangling the Delhi High Court settled the position, and Tata Sons had to pay Docomo its due.
Essentially, Tata Sons bought out Docomo’s stake in TTSL by paying over $1 billion, which was taxable under income tax laws. But now, the GST authorities have stepped in for a piece of the pie, using a provision that can cover specific performance agreements under various contracts. Applying a literal reading of the law, the GST authorities are using a provision meant to tax non-compete fees, to tax Tata-Docomo transaction under the GST law.
The buyout of shares is a capital transaction, not a revenue transaction. It would anyway incur capital gains tax under the income tax law. But Tata buying out Docomo’s stake in TTSL doesn’t amount to supply of any kind of goods or service by Tata Sons, and hence shouldn’t be taxed under GST.
Experts believe that such actions by revenue authorities can open up a Pandora’s box. All kinds of specific performance contracts — including conditional conversion of debentures and preference shares — will incur GST if officials continue on this path. Revenue authorities would understandably want to interpret the law to their benefit to meet their revenue collection targets. But a literal interpretation of the law, and ignoring the substance of the transaction, the GST authorities might end up stirring unnecessary trouble. This could lead to various cases being filed across the country on similar specific performance contracts. Such fishing expeditions will only vitiate the tax atmosphere, and lead to needless litigation.
Source- Business Line.