Govt does sudden U-turn, buries retrospective tax: Rs 1.1-lakh-crore tax demands nullified; Rs 8,100 crore to be refunded

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August 06, 2021 3:00 AM

Revenue secretary Tarun Bajaj said: “Companies (affected by retrospective tax law) should also be reaching out to us, and try to work out solutions.”

The government has so far recovered Rs 8,100 crore, invoking the controversial law, including Rs 7,600 crore from Cairn Energy.The government has so far recovered Rs 8,100 crore, invoking the controversial law, including Rs 7,600 crore from Cairn Energy.

The government on Thursday put to rest its infamous 2012-born tax law that sought to retrospectively tax gains from indirect transfer of Indian assets. Though the move notionally involves a scaling down of New Delhi’s tax revenue ambitions by at least Rs 1.1 lakh crore, any potential loss could be more than offset as the decision could improve the country’s standing as an investment destination, boosting its growth potential and thereby tax receipts.

The surprise tabling of the ‘The Taxation Laws (Amendment) Bill, 2021’ by finance minister Nirmala Sitharaman in the Lok Sabha was hailed by industry and tax experts. Government managers justified the decision that amounted to a U-turn from New Delhi’s public posturing on the issue, saying it was necessary given that more than anything else, the policy focus should now be on ensuring the country’s ‘future growth’.

For the record, the Bill provides for the withdrawal of tax demand made on “indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e. the day the retrospective tax legislation came into being)”. It is also proposed to refund the amount paid in these cases without any interest thereon.

The government has so far recovered Rs 8,100 crore, invoking the controversial law, including Rs 7,600 crore from Cairn Energy.

The 2012 law had empowered the government of India to make tax demands concerning cross-border deals all the way back to 1962; the intent was to tax gains arising out of transfer of shares of companies registered outside India provided such shares derived ‘substantial value’ from assets located in India. The move has since been exposed as a misadventure; the Hague Court ruled against against India in the two resultant high-profile cases involving telecom giant Vodafone and UK-based Cairn Energy in September 2020 and December 2020 respectively.

In fact, the 2012 amendment was meant to overturn a Supreme Court verdict that invalidated a retrospective-tax notice claims slapped on Vodafone in relation to its 2007 $11-billion acquisition of 67% stake in the Indian mobile-phone business owned by Hutchison Whampoa.

In all, 17 cases of such retrospective taxation have been pursued by the Indian taxman while the assessment process is on in relation to another two; the modest success on the revenue front has been more than offset by the loss of reputation as a predictable tax dispensation.

Finance secretary TV Somanathan told FE: “The move is part of the overall strategy of boosting the country’s future rate of growth and reaching our goal of a $5-trillion economy. This (amendment) is to make India an even more attractive destination for investment, both domestic and foreign, as we have a predictable and low-rate tax regime for corporates.” Somanathan said: “We are consistent with earlier position– we have the sovereign right to tax and we preserve that right. We don’t we accept that the sovereign right of Parliament is being arbitrated in foreign courts. Yet, we won’t enforce tax demands based on retrospective change and amount collected to be refunded without interest.”

Revenue secretary Tarun Bajaj said: “Companies (affected by retrospective tax law) should also be reaching out to us, and try to work out solutions.”

Calling the government’s latest move a welcome step, noted tax expert Mukesh Butani said: “The bill essentially proposes to set May 28, 2012 ( the date when Finance Bill of 2012 was passed by the Parliament approving the retrospective amendment) as the date and tax demands raised prior to that date will stand nullified, subject to conditions such as withdrawal of pending litigation etc.” The outcome of this is that Cairn Energy case which was reopened using the retrospective amendment and the reassessment proceedings would stand nullified.

“The second part deals with a situation where as a result of the retrospective law, a demand has created due to application of law as a result of which its tax refund situation has been impacted and the third deals with situations where a demand has arisen on account of withholding tax obligation thrust on the payor of such consideration. The amendments also deals with situations where penalty proceedings have been initiated and they would stand nullified even in situations where demand has been raised”, Butani explained.

Besides, the Bill seeks to ward of any risk posed to taxpayers due to public interest litigation against the government. The situations covered include appeals before the high court, Supreme Court and foreign arbitral award. The bill provides that the validation clause insofar as the recovery of demand is concerned will cease to apply.

In the Cairn Energy case, even before the arbitral award was pronounced by the Permanent Court of Arbitration at The Hague, India had seized and sold shares of Cairn in its erstwhile India unit, confiscated dividends and withheld tax refunds totalling Rs 7,600 crore. The Hague court asked the government to compensate Cairn “for the total harm suffered” together with interest and cost of arbitration.

In its order in the Cairn case, three-member tribunal, including India’s nominee J Christopher Thomas QC, said the retrospective tax demand was “in breach of the guarantee of fair and equitable treatment”. Affirming its jurisdiction over the case, the tribunal said the Cairn case was not just a tax-related, but an investment-related dispute. The India government’s contention was that tax orders, including those under retrospective laws, cannot be arbitrated under bilateral investment treaties (BITs). Affirming this stance, the government brought in a new model BIT in 2016, explicitly excluding tax matters from its purview.

On its part, Cairn has been trying to recover the sums by attaching and monetising Indian assets overseas – of late, to New Delhi’s embarrassment, it secured a French court order to seize about 20 Indian government properties worth Rs 177 crore in Paris. The government recently said it had roped in an international law firm to handle the enforcement proceedings. An unsuccessful attempt was earlier made by the government to settle the Cairn dispute under the Vivad se Vishwas scheme, under which the company was required to pay around half the amount due sans interest and penalties.

Cairn tax dispute pertains to the instance where as part of an internal rearrangement through a firm in European tax haven of Jersey, Cairn UK transferred shares of Cairn India Holdings to Cairn India.

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