The government said it was undertaking the amendments to bring tax certainty for potential investors at a time when India is being pitched as an investment destination, and foreign income will aid in faster economic recovery and employment amid the Covid 19 pandemic.
Finance minister Nirmala Sitharaman introduced a bill to amend the Income Tax Act and the Finance Act of 2012 in Lok Sabha Thursday, which said that tax demand raised on transactions involving indirect transfer of Indian assets before May 28, 2012 – when the retrospective taxation amendment was first introduced – will be nullified on certain conditions.
Litigation in the High Court, Supreme Court or other fora, including proceedings of arbitration, conciliation or mediation under any treaty, will have to be withdrawn by the taxpayer or an undertaking for withdrawal of pending litigation will have to be filed, along with an undertaking of not claiming cost, damages or interest. Taxpayer will also have to waive his rights to pursue any claims.
Once the conditions are fulfilled, the validation of demand from the tax department will also cease to apply, the amendment has further proposed. Government will refund the amount paid by the taxpayer without interest, in the cases that are settled.
The bill will require passing in Lok Sabha and Rajya Sabha to come into effect.
The government said that the retrospective taxation amendments introduced on May 28, 2012 had been criticised by stakeholders as it ‘militated’ against principle of tax certainty while damaging India’s reputation as an attractive destination, even as major reforms were initiated in the financial and infrastructure sectors over the past few years.
“This retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors,” Sitharaman said in a statement of objects and reasons along with the bill.
“The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment,” she added.
Sitharaman noted that following the 2012 retrospective amendment, income tax demands have been raised in 17 cases, of which assessments in two cases are pending due to stay by High Courts.
Of the remaining, arbitration under Bilateral Investment Protection Treaty with United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of taxpayer and against the income tax department.
While the government did not name the two companies, Vodafone Group and Cairn Energy have won international tribunal awards against the government last year. India has appealed against the orders in Singapore and The Netherlands, respectively.
Impact on Cairn, Vodafone & 15 other cases
India will withdraw the appeals against the arbitration award in case of Vodafone and Cairn and other companies and release Rs 8,089 crore collected so far only after a formal undertaking and withdrawal of cases from all legal fora by these companies.
A senior government official told ET that appeals filed against awards under the Bilateral Investment Treaties would be withdrawn only after these companies furnish an undertaking to withdraw all legal cases and accept the settlement offered.
“They will have to furnish an undertaking about withdrawal of all legal challenges filed at any legal fora,” the official said.
Government will have to pay Rs 7,880 crore to Cairn, Rs 44.7 crore to Vodafone, Rs 119 crore to New Cingular Wireless and Rs 47 crore to WNS Global. There are 17 cases in all at various legal fora, but tax was collected only in four, the official said. This payment will only include principal tax demand sans interest and penalty collected from them.
Vodafone Group issue
The retrospective taxation issue began in 2012, after the Supreme Court ruled in favour of Vodafone Group. Vodafone had acquired a controlling stake in Indian telecom operator Hutchison Essar in 2007 in an $11.2 billion deal executed overseas. India’s tax department said Vodafone should have withheld tax on the deal and issued a notice seeking Rs 11,218 crore, later augmented by Rs 7,900 crore in penalties.
While Vodafone Group won the case in the Supreme Court, the government retrospectively amended the income tax law to tax offshore deals involving transfer of Indian assets, leading to a tax dispute of Rs 22,100 crore.
Vodafone sought arbitration under the India-Netherlands Bilateral Investment Promotion and Protection Agreement in 2014.
In September 2020, the Permanent Court of Arbitration at The Hague ruled that Vodafone was entitled to protection of its investments under an India-Netherlands treaty and asked India to cease such breaches of the international treaty.
The tribunal directed India to reimburse 4.3 million pounds along with 3,000 euros as legal costs. The government’s liability totalled Rs 85 crore, including Rs 45 crore of tax levy that was asked to be refunded.
The Permanent Court of Arbitration held that the retrospective legislation was in breach of the “guarantee of fair and equitable treatment”.
India has appealed against the decision and a division of the high court in Singapore will hear the Indian government’s appeal in September.
Cairn story
India filed an appeal in March to set aside an award in favour of against Cairn Energy Plc given by The Hague Court of Appeal in December 2020 in a dispute which arose in 2015 after the government demanded capital gains tax of Rs 10,200 crore plus interest and penalty over a reorganisation of assets that Cairn undertook at its India unit in 2006, ahead of the listing of its shares in 2007.
The Permanent Court of Arbitration had ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld, amounting to over $1.2 billion. The company says it is now owed $1.7 billion.
The UK-based oil and gas company has begun proceedings in international courts to seize Indian assets overseas to recover the money from the government under the award.
The arbitration award has been registered in other jurisdictions, including the US, UK, Canada, Singapore, Mauritius, France and the Netherlands, where India has high-value assets. In France, a Court passed orders to freeze Indian assets worth 20 million Euros in Paris. In the US, Cairn approached a New York court to attach the assets of national carrier Air India.
Experts laud bold move
Experts welcomed the government’s bold move, saying that it will bring a lot of stability in the minds of foreign investors looking at investing in or entering India for the long run.
“This is obviously a huge positive signal for foreign investors to continue to put their faith in the stability and certainty of tax laws in India. It seems a good opportunity for the affected taxpayers to close all the past disputes and avoid future litigation costs though they may have to give up on interest and damages,” said Sudhir Kapadia, tax leader at EY.
”The withdrawal of the retrospective amendment relating to tax on indirect transfers is a welcome step and would reignite the choice of India as a favourable investment destination coupled with the low tax rates,” said Amrish Shah, partner at Deloitte India. India slashed its corporate income tax rates to 15% to new companies including manufacturing firms, and to 22% for companies that gave up all exemptions and incentives in September 2019, versus 30% they used to attract earlier.
Industry watchers said that with Indian has not only stood ground on not introducing retrospective tax amendments but also dealt with the key existing issue which was not appreciated by the investor community.
Tax department had reopened assessment in few cases citing the retrospective amendments, which are pending in different High Courts and in some cases in arbitration. “Now with this proposal, the tax department will not treat the said assesses as in default provided the pending litigation is withdrawn. This effectively resolves the dispute,” Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co said.
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