New Delhi: In a major development that may well help India enhance its ranking in terms of ease of doing business, the government has brought about a fresh set of amendments to the tax laws to nullify the retrospective tax provisions introduced in 2012.
The government on Thursday introduced the Taxation Laws (Amendment) Bill, 2021 in the Parliament to do away with the contentious retrospective tax demand provisions and its passage may end the much-stretched tax disputes with UK’s Cairn Energy, and Vodafone Plc.
The Bill proposes to amend the Income Tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 – when the finance bill was passed by Parliament in 2012.
The bill also proposes to provide that the demand raised for indirect transfer of Indian assets, made before May 28, 2012, shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, and others shall be filed.
Further, as per the bill, the amount paid in these cases would be refunded without any interest thereon.
The issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company was a subject matter of protracted litigation.
The Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act.
As the verdict was inconsistent with the legislative intent, the provisions of the Income Tax Act were amended by the Finance Act, 2012, with retrospective effect, to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India.
The Finance Act, 2012 also provided for validation of demand, under the Income Tax Act, for cases relating to indirect transfer of Indian assets.
Pursuant thereto, income tax demand had been raised in 17 cases. In two cases, assessments are pending due to stay granted by the high courts. Out of the 17 cases, arbitration under the Bilateral Investment Protection Treaty with the UK and the Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of the taxpayer and against the Income Tax Department.
This Bill would give Cairn Energy and Vodafone Plc a window to do away with the arbitrations and settle their long-drawn tax disputes with the government.
An arbitration tribunal in The Hague had pronounced its award on December 21, 2020 in favour of Cairn Energy Plc and Cairn UK Holdings Ltd (CUHL), making the Indian government liable to pay an arbitration award of $1.2 billion to it.
Recently, the government confirmed in the parliament that a French court has directed the freezing of certain properties of the Indian government in the matter pertaining to the Cairn arbitration award.
Further, in the Vodafone arbitration case, the Permanent Court of Arbitration at The Hague ruled in favour of the company last year.
The court ruled that the conduct of India’s Tax Department is in breach of “fair and equitable” treatment, thereby rendering Vodafone not liable to pay a retrospective tax demand of more than Rs 20,000 crore raised by Indian authorities.
Tax expert and the Institute of Chartered Accountants of India’s former President, Ved Jain, was of the opinion that the development would be a big relief for Vodafone and Cairn.
“The Taxation Laws (Amendment) Bill, 2021, introduced by FM today in the Lok Sabha, is about withdrawing retrospective amendment made in 2012 of taxing capital gains arising from indirect transfer of assets located in India. This will settle issue of arbitration as under the Indian Income Tax Act itself, no tax will be payable on such capital gains up to May 28, 2012 when this amendment came into force,” he said.
Noting that the proposed amendments can help put an end to long drawn litigation on this vexed issue, KPMG in India’s Partner, Tax, Naveen Aggarwal said: “However, it is important to note that the nullification of demands in such cases is not automatic, but is subject to certain conditions which include the withdrawal of cases and claims for costs, interest and damages by the affected taxpayers.”
Deloitte India Managing Partner for Tax, Vipul Jhaveri, said that the amendment shall create an expectation for companies to get refund for the disputed taxes that may have been paid during litigation.
“The government’s move would also build the confidence of foreign investors to attract new investments that are crucial for reviving economic growth,” he said.
Shardul Amarchand Mangaldas & Co Partner Abhay Sharma said: “The taxpayer would be required to submit an undertaking waiving his right to pursue a claim in India or abroad in order to take the benefit of the revised section. It’s a welcome move albeit a bit late in the day.”
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