Defanging retrospective tax: Better late than never

August 13, 2021 6:30 AM

The success of this amendment will depend on how many of the 17 taxpayers agree to end the litigation by complying with the specified conditions

A foundational move, offering safeguards to taxpayers, is the Taxpayers’ Charter 2020. Upon detailed examination of the rights and obligations laid out in the charter, some perspectives emerge.A foundational move, offering safeguards to taxpayers, is the Taxpayers’ Charter 2020. Upon detailed examination of the rights and obligations laid out in the charter, some perspectives emerge.

By Pranav Sayta

The government of India (GOI), to make the country a preferred investment jurisdiction, has taken the decisive step to settle the protracted income-tax litigation (including the widely reported ones like Vodafone and Cairn) on capital gains arising from transfer of shares of offshore companies that derive substantial value from Indian assets (indirect transfers). The Supreme Court, in the landmark judgment in Vodafone International Holdings BV, had ruled in favour of taxpayers, holding that indirect transfers are not subject to Indian income tax.

Subsequently, ‘clarificatory’ amendments were introduced in the Income-tax Act 1961 vide Finance Act 2012 to provide for levy of tax on indirect transfers with retroactive effect from April 1, 1962. This move was criticised for reasons including on grounds of fairness, reasonableness, and the need for India’s tax regime to provide clarity and certainty. The amendment continues to be a sore point in the eyes of global investors.

Pursuant to the above amendment, the I-T Department had raised demand in 17 cases including in Vodafone and Cairn. In four cases, arbitration was invoked under the BIPA with the UK and the Netherlands with the arbitration tribunal ruling in favour of taxpayers in two cases (Vodafone and Cairn). GOI’s appeal against the Cairn and Vodafone awards are pending before courts in the respective arbitral jurisdictions. Cairn’s efforts to enforce the award recovery (taxes including interest, award for costs) in international jurisdictions has also been widely reported.

GOI has been taking steps including providing fiscal incentives and lowering of corporate income-tax rates to provide an impetus to economic growth and attracting FDI. Clarity in tax policies and certainty and stability in tax regime have been highlighted as pillars of GOI’s policy. But the said retrospective amendment and the litigation consequent to such amendment continue to be a sore point for the international investor community.

GOI has proposed to remove retrospective amendments relating to indirect transfers. In a historic move, the Taxation Laws (Amendment) Bill 2021 (the Bill) was passed by the Lok Sabha last week which provides for the following:
1. No levy of taxes or enforcement of tax demands on indirect transfers undertaken prior to May 28, 2012;
2. Subject to satisfaction of prescribed conditions, notices/assessment orders raised in respect of indirect transfers prior to May 28, 2012, to cease to have effect;
3. Taxes collected in respect of indirect transfers undertaken prior to May 28, 2012, to be refunded without interest.

The withdrawal is, however, subject to conditions such as withdrawal of pending appeals, writs and SLPs, arbitration, mediations and conciliations if any initiated by the taxpayer. Also, the taxpayer is required to give an undertaking waiving all his rights to pursue any claim or remedy under any other law in force including right of recovery of costs and damages.

Taxpayers who wish to avail the benefits of the proposals under the Bill may need to carefully evaluate, between pursuing arbitration/litigation and claiming damages, costs and interest in addition to refund of tax collected if any on the one hand, and to get demands annulled and obtain a quick refund of the tax while foregoing their rights to claim interest, costs and damages, on the other hand. An issue that may also weigh with taxpayers may be that, while the refund of taxes granted today will be the full amount of Indian rupees collected as taxes earlier, it may translate into a smaller amount in dollar relative to the amount originally paid, in view of, say, an adverse fluctuation in exchange rates in the interim period.

The retrospective amendment of 2012 and the subsequent global arbitrations continue to have an adverse impact on India’s image as an investor-friendly jurisdiction. Given this, the withdrawal of retroactive effect of indirect transfers is a welcome move especially after the long bruising legal battle between GOI and taxpayers. While the amendment is conditional and requires taxpayers to take corresponding steps to settle the dispute, GOI has taken a step in the right direction by signalling its intent to end the litigation and create a stable tax regime in India.

While the success of this amendment will depend on how many of the 17 taxpayers agree to end the litigation by complying with specified conditions, it is likely to provide assurance to the global community in relation to India’s credentials as an investor-friendly jurisdiction. Though this step has probably taken more time than one would have liked, this is another step in the direction of ‘Vivaad se Vishwas’.

The author is national leader, International Tax and Transaction Services, EY India. Views are personal

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