The measure called as General Anti Avoidance Rule (GAAR) will give income tax (I-T) department the authority to enforce taxes on transactions that involve transfer of shares between two non-residents, even if 50% of the assets are in India.
The I-T act at present do not have any provisions that empowers the department to look into deal structures. It also does not authorise the department to "look through" subsidiaries in multi-jurisdictional transactions.
The Supreme Court earlier ruled that British telecom giant Vodafone Plc wasn't entitled to pay taxes for a transaction that the company signed in 2007, in a bid to acquire a major stake in telecom giant-Hutchison Essar.
Vodafone Plc was however, asked to pay Rs 11,218-crore tax bill after it acquired 67% stake in Hutchison Essar for Rs 55,000 crore in 2007.
The I-T department in its argument said that though the payment to Hong Kong-based Hutchison's subsidiary in Cayman Islands was made by Vodafone Plc, it was in actuality the transfer of an Indian asset and Vodafone should have deducted tax at source after it paid Hutchison.
The Supreme Court however, said that the deal did not fall under India's territorial tax jurisdiction and therefore, it was not taxable.
"It is likely that provisions of a few sections in the I-T Act will be amended in this year's budget to expand the scope to include transfer of capital asset causing indirect transfer of interest in Indian investments as proposed in the Direct Taxes Code (DTC)," said a government source.