The Central Board of Direct Taxes has proposed that the sale of capital assets of a company operating in India, but registered overseas, in an international merger and acquisition deal should be brought under the tax net via an amendment in the Income Tax Act, 1961.

Accordingly, it has proposed to the department of revenue to expand the list of taxable transactions covered under Section 9 of the Income Tax Act. This section deals with deemed profits and enlists various items where the income of a foreign entity is taxed in India.

A major part of such income includes royalties and technical fees paid by an Indian entity to its overseas partner. The new item proposed to be included in Section 9 aims at covering transfer of capital assets overseas, because the income of the company will be deemed to have accrued in India.

CBDT has also suggested an amendment aimed at taxing the income of foreign shipping companies, which do not operate in India, but handle cargo of domestic companies through shipping agents based here.

The income tax authorities are of the view that even if a foreign shipping company does not have an office in India, its authorised shipping agent is responsible for handling the freight of Indian companies and liasioning between Indian and foreign shipping companies.

Therefore, the shipping agent will be deemed a permanent establishment for taxation purposes. The charges for inland carriage of cargo or containers between locations are collected by foreign shipping companies through their Indian agents.

Foreign shipping companies, on the other hand, are primarily engaged in the the business of operation of ships in international waters and undertake to deliver cargo from shippers to consignees. The demand for taxing such income arises since shippers or consignees are situated at different inland locations away from ports, added a tax consultant.

A tax expert with a top consultancy firm said the provision, as proposed through an amendment to Section 9 of the IT Act, was not prevalent anywhere else in the world.

"This acquires importance not only for companies such as Vodafone Essar, but also Indian companies acquiring assets overseas," he added.

A consultant added that if India's tax laws are amended to include transfer of capital assets overseas, it could have far reaching implications.

A case in point is the recent transfer of shares by Hong Kong-based Hutchison Telecom International Ltd, in Hutchison Essar Ltd, a mobile services operator in India, to the UK-based global telecom player Vodafone plc.

The income tax department has reportedly raised a demand of $2 billion as withholding tax from the Indian entity, now called Vodafone Essar. The M&A deal had seen HTIL, Hong Kong transfer shares to Vodafone International Holding BV, the Netherlands. Vodafone Essar has contested this tax demand and the case is being heard at the Bombay high court.