India seeks to amend retrospective tax law, FM introduces bill in Lok Sabha

India has proposed to withdraw retrospective taxation on oblique transfers of Indian property and impose it prospectively from Could 28, 2012, paving manner for settling the long-drawn litigation with Vodafone Group and Cairn Energy.

The federal government mentioned it was endeavor the amendments to deliver tax certainty for potential buyers at a time when India is being pitched as an funding vacation spot, and overseas revenue will assist in sooner financial restoration and employment amid the Covid 19 pandemic.

Finance minister Nirmala Sitharaman launched a invoice to amend the Income Tax Act and the Finance Act of 2012 in Lok Sabha Thursday, which mentioned that tax demand raised on transactions involving oblique switch of Indian property earlier than Could 28, 2012 – when the retrospective taxation modification was first launched – shall be nullified on sure situations.

Litigation within the Excessive Court docket, Supreme Court docket or different fora, together with proceedings of arbitration, conciliation or mediation beneath any treaty, must be withdrawn by the taxpayer or an endeavor for withdrawal of pending litigation must be filed, together with an endeavor of not claiming value, damages or curiosity. Taxpayer may also need to waive his rights to pursue any claims.

As soon as the situations are fulfilled, the validation of demand from the tax department may also stop to use, the modification has additional proposed. Authorities will refund the quantity paid by the taxpayer with out curiosity, within the circumstances which are settled.

The invoice would require passing in Lok Sabha and Rajya Sabha to return into impact.

The federal government mentioned that the retrospective taxation amendments launched on Could 28, 2012 had been criticised by stakeholders because it ‘militated’ in opposition to precept of tax certainty whereas damaging India’s repute as a horny vacation spot, at the same time as main reforms had been initiated within the monetary and infrastructure sectors over the previous few years.

“This retrospective clarificatory modification and consequent demand created in a couple of circumstances continues to be a sore level with potential buyers,” Sitharaman mentioned in a press release of objects and causes together with the invoice.

“The nation right this moment stands at a juncture when fast restoration of the economic system after the COVID-19 pandemic is the necessity of the hour and overseas funding has an essential position to play in selling sooner financial development and employment,” she added.

Sitharaman famous that following the 2012 retrospective modification, revenue tax calls for have been raised in 17 circumstances, of which assessments in two circumstances are pending on account of keep by Excessive Courts.

Of the remaining, arbitration beneath Bilateral Funding Safety Treaty with United Kingdom and Netherlands had been invoked in 4 circumstances. In two circumstances, the Arbitration Tribunal dominated in favour of taxpayer and in opposition to the revenue tax division.

Whereas the federal government didn’t title the 2 corporations, Vodafone Group and Cairn Vitality have received worldwide tribunal awards in opposition to the federal government final 12 months. India has appealed in opposition to the orders in Singapore and The Netherlands, respectively.

Influence on Cairn, Vodafone & 15 different circumstances

India will withdraw the appeals in opposition to the arbitration award in case of Vodafone and Cairn and different corporations and launch Rs 8,089 crore collected to date solely after a proper endeavor and withdrawal of circumstances from all authorized fora by these corporations.

A senior authorities official instructed ET that appeals filed in opposition to awards beneath the Bilateral Funding Treaties can be withdrawn solely after these corporations furnish an endeavor to withdraw all authorized circumstances and settle for the settlement supplied.

“They must furnish an endeavor about withdrawal of all authorized challenges filed at any authorized fora,” the official mentioned.

Authorities must pay Rs 7,880 crore to Cairn, Rs 44.7 crore to Vodafone, Rs 119 crore to New Cingular Wi-fi and Rs 47 crore to WNS International. There are 17 circumstances in all at varied authorized fora, however tax was collected solely in 4, the official mentioned. This fee will solely embody principal tax demand sans curiosity and penalty collected from them.

Vodafone Group challenge

The retrospective taxation challenge started in 2012, after the Supreme Court docket dominated 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 abroad. India’s tax division mentioned Vodafone ought to have withheld tax on the deal and issued a discover looking for Rs 11,218 crore, later augmented by Rs 7,900 crore in penalties.

Whereas Vodafone Group received the case within the Supreme Court docket, the federal government retrospectively amended the revenue tax legislation to tax offshore offers involving switch of Indian property, resulting in a tax dispute of Rs 22,100 crore.

Vodafone sought arbitration beneath the India-Netherlands Bilateral Funding Promotion and Safety Settlement in 2014.

In September 2020, the Everlasting Court docket of Arbitration at The Hague dominated that Vodafone was entitled to safety of its investments beneath an India-Netherlands treaty and requested India to stop such breaches of the worldwide treaty.

The tribunal directed India to reimburse 4.3 million kilos together with 3,000 euros as authorized prices. The federal government’s legal responsibility totalled Rs 85 crore, together with Rs 45 crore of tax levy that was requested to be refunded.

The Everlasting Court docket of Arbitration held that the retrospective laws was in breach of the “assure of honest and equitable remedy”.

India has appealed in opposition to the choice and a division of the excessive courtroom in Singapore will hear the Indian authorities’s attraction in September.

Cairn story

India filed an attraction in March to put aside an award in favour of in opposition to Cairn Vitality Plc given by The Hague Court docket of Enchantment in December 2020 in a dispute which arose in 2015 after the federal government demanded capital beneficial properties tax of Rs 10,200 crore plus curiosity and penalty over a reorganisation of property that Cairn undertook at its India unit in 2006, forward of the itemizing of its shares in 2007.

The Everlasting Court docket of Arbitration had ordered the federal government to return the worth of shares it had bought, dividends seized and tax refunds withheld, amounting to over $1.2 billion. The corporate says it’s now owed $1.7 billion.

The UK-based oil and fuel firm has begun proceedings in worldwide courts to grab Indian property abroad to get better the cash from the federal government beneath the award.

The arbitration award has been registered in different jurisdictions, together with the US, UK, Canada, Singapore, Mauritius, France and the Netherlands, the place India has high-value property. In France, a Court docket handed orders to freeze Indian property value 20 million Euros in Paris. Within the US, Cairn approached a New York courtroom to connect the property of nationwide provider Air India.

Consultants laud daring transfer

Consultants welcomed the federal government’s daring transfer, saying that it’ll deliver numerous stability within the minds of overseas buyers investing in or coming into India for the long term.

“That is clearly an enormous constructive sign for overseas buyers to proceed to place their religion within the stability and certainty of tax legal guidelines in India. It appears a very good alternative for the affected taxpayers to shut all of the previous disputes and keep away from future litigation prices although they could have to surrender on curiosity and damages,” mentioned Sudhir Kapadia, tax chief at EY.

”The withdrawal of the retrospective modification referring to tax on oblique transfers is a welcome step and would reignite the selection of India as a beneficial funding vacation spot coupled with the low tax charges,” mentioned Amrish Shah, companion at Deloitte India. India slashed its company revenue tax charges to fifteen% to new corporations together with manufacturing companies, and to 22% for corporations that gave up all exemptions and incentives in September 2019, versus 30% they used to draw earlier.

Business watchers mentioned that with Indian has not solely stood floor on not introducing retrospective tax amendments but additionally handled the important thing current challenge which was not appreciated by the investor neighborhood.

Tax division had reopened evaluation in few circumstances citing the retrospective amendments, that are pending in numerous Excessive Courts and in some circumstances in arbitration. “Now with this proposal, the tax division won’t deal with the mentioned assesses as in default offered the pending litigation is withdrawn. This successfully resolves the dispute,” Amit Singhania, Companion, Shardul Amarchand Mangaldas & Co mentioned.

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