The amendment to the Income-Tax Act, 1961, which received the President’s assent in May 2012, allowed the government to ask companies to pay taxes on mergers and acquisitions that happened before that date.
The government has proposed to withdraw the infamous retrospective tax law, which hounded big foreign companies including Vodafone and Cairn Energy with billions of dollars of tax demands. The bill, introduced in Lok Sabha today, proposed to withdraw the law that allowed the government to raise tax demands with retrospective effect for the sale of assets before May 2012. The move comes after India lost international arbitration with Cairn, and just ahead of a similar arbitration ruling in Vodafone case over a similar demand. The retrospective tax rule was an amendment to the Income-Tax Act, 1961, which received the President’s assent in May 2012, allowing the government to ask companies to pay taxes on mergers and acquisitions that happened before that date.
Demands made shall be nullified
Fresh bill introduced today proposed 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 28th May, 2012. The bill adds that demand raised for indirect transfer of Indian assets made before May 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 shall be filed.
“This bill means the government is giving away the right to retrospectively tax transactions entered before May 2012. So far, India is not accepting the arbitration awards on the basis of sovereign rights to taxability,” said Neha Malhotra, Director, Nangia Andersen LLP. “This proposed law also takes away the defame that India could go back and tax retrospectively. For Vodafone and Cairn, it’s opening the doors of friendship and resolution of long-pending litigation. It’s the government’s way of resolving the issue with companies such as Vodafone and Cairn,” she added.
Introduced by Finance Minister Nirmala Sitharaman, the bill also proposes to refund the amount paid in these cases without any interest thereon. “The government has proposed to refund the tax collected, though without interest, provided the companies don’t go into arbitration and withdraw litigation pending before any forum in India,” Neha Malhotra said.
Calling it a welcome change, SR Patnaik, Partner & Head – Taxation, Cyril Amarchand Mangaldas said that the move helps the government’s claim that they welcome foreign investment into the country. SR Patnaik believes that the move will strengthen India’s attractiveness among foreign investors.
Cairn Energy upped the ante
Delhi’s retrospective tax rule was invalidated by the Permanent Court of Arbitration at The Hague in December last year, which had also asked the government of India to return up to $1.4 billion in funds withheld, interest and costs, to British firm Cairn Energy Plc. Following this, Cairn has upped the ante against Delhi and in May brought a lawsuit in the US District Court for the Southern District of New York pleading that Air India is controlled by the Indian government so much that they are ‘alter egos’ and the airline should be held liable for the arbitration award.
Reportedly, Cairn Energy has also secured an order from a French court authorising the freezing of 20 Indian government properties in Paris valued at over 20 million euros. However, the Government of India has denied this claim.
Currently, there are seventeen cases with the government where income-tax demand has been raised. “Out of the said seventeen cases, 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,” the government said.