India has also prepared a new model text for India's Bilateral Investment Treaty (BIT), which explicitly bars any enterprise from a treaty partner country from seeking relief in tax disputes under the treaty.
While the government’s decision not to pursue the tax demands with regard to indirect transfer of Indian assets in deals prior to May 28, 2012 will help resolve the bulk of retrospective tax disputes, tax experts are confident that prospective application of the tax won’t create much disputes either. “The law is clear so there won’t be many cases of disputes in deals after May 2012,” said Mukesh Bhutani, managing partner of BMR Legal.
Tax relief on the capital gains on indirect transfer of indirect transfer of Indian assets can be availed by firms based out of countries with which India has treaties that provide for such benefits, but in other cases, which are more in number, the buyer concerned will have the obligation to withhold tax on behalf of the Indian government while making payments to the sellers.
There have been many offshore transactions with underlying Indian assets post May 28, 2012, some of which involving assets above threshold values prescribed for taxation in India. For example in the 2018 Walmart-Flipkart deal, Tiger Global International based out of Mauritius didn’t challenge levy of tax under Section 9 (indirect transfer rule), but claimed the benefit of India-Mauritius tax treaty, which allowed taxation of shares in the host country (Mauritius), where a low-tax regime prevailed. The Authority for Advance Ruling, however, denied the PE firm benefits of grandfathering provisions under the India-Mauritius DTAA.
As in Septemer 2018, Walmart had paid nearly Rs 7,500-crore tax to India on payments it made to buy out 10 major shareholders of Flipkart.
Tax benefits vary from treaty to treaty with countries. Up to April 1, 2017, Mauritius and Singapore DTAAs offered tax benefits on transfer of shares. Under the revised DTAAs with these two countries, benefit is available on transfers of assets excluding share transfers.
“If the tax treaties provide that such transfer would be taxable only in the resident country of the non-resident (like Zambia) then India would have no right to tax such transfers. However, in most of the tax treaties, India has with foreign countries, the right to tax the capital gains (including arising on indirect transfer of Indian assets) remains with India only,” said Naveen Wadhwa, DGM, Taxmann.
India has also prepared a new model text for India’s Bilateral Investment Treaty (BIT), which explicitly bars any enterprise from a treaty partner country from seeking relief in tax disputes under the treaty.
The idea behind such tightening of treaty use is to thwart instances of companies that are embroiled in tax disputes with the government from seeking recourse to international arbitration and demand compensation if assets are attached as part of tax proceedings. The revised model BIT will be used for re-negotiation of existing (83) BITs and negotiation of future BITs.
A former Central Board of Direct Taxes (CBDT) member expressed confidence that there might not be many tax disputes on indirect transfer of Indian assets post May 28, 2012, even though some entities might seek treaty protection legitilately.