India’s Parliament Approves Bill to End Retrospective Taxation, Amend Tax Law
India is to end retrospective tax of capital gains from sale of assets located in the country by entities registered abroad. The development comes after major setbacks in arbitration cases involving retro tax demands contested by Cairn Energy and Vodafone. The Indian government will also refund the money collected on the basis of retrospective taxation, but without any interest, subject to certain stipulated conditions. An end to retrospective taxation has been long demanded by the international business community, and will remove unnecessary uncertainty over triggering corporate tax liabilities for an MNC in India. Previously, the Finance Act of 2012 enabled India’s tax department to impose tax on gains arising from the sale of shares of a foreign company — if such shares derived their value from assets located in India.
On August 5, 2021, the central government introduced ‘The Taxation Laws (Amendment) Bill, 2021’ in the lower house of parliament that seeks to withdraw tax demands made using the 2012 Finance Act, which enabled the collection of retrospective tax on indirect transfer of Indian assets. The bill is an outcome of India’s long-time tax disputes with UK firms Cairn Energy PLC and Vodafone Group.
On Friday, August 6, the bill was approved by the lower house. On Monday, August 9, the bill was returned from the upper house amid a walk-out from opposition parties, and since no objection has been recorded, the bill will move to receive the President’s assent.
Once the bill receives the President’s assent, which is only a matter of procedure, the Indian government aims to settle the pending tax disputes. As per a senior Finance Ministry official speaking to the media, “Among the four main companies which are to get refund, Cairn is the largest one and it is already in touch with the government. Still, we will communicate to it about the new law. We will also talk to the other three.”
The other three cases involve New Singular Wireless (INR 1.19 billion / US$16.03 million), WNS Capital (INR 470 million / US$6.33 million), and Vodafone (INR 447.4 million / US$6.03 million).
The Central Board of Direct Taxes (CBDT) Chairperson JB Mohapatra told media this week that the Indian government will have to pay INR 80 billion (approx. US$1.075 billion) to four companies, including Cairn Energy, Vodafone, and WNS Capital. The refund amount will not include interest.
What is the tax amendment bill proposing and will there be any future scope for retrospective tax in India?
The Taxation Laws (Amendment) Bill, 2021 seeks to amend the Income-Tax Act, 1961 so that no retrospective tax demand shall be raised on any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (that is, the date on which the Finance Bill, 2012 received the President’s assent).
The bill proposes that tax demand raised for indirect transfer of Indian assets made before May 28, 2012 shall be nullified on the fulfillment of specified conditions, such as the withdrawal or furnishing of undertaking for the withdrawal of pending litigation and furnishing an undertaking that no claim for cost, damages, interest etc. shall be filed.
The bill proposes to refund the amount paid in these cases without any interest thereon. Given this intention, the Indian government will have to refund US$1.2 billion to Cairn Energy for the shares of the company it had sold, tax refund withheld, and dividends that had been confiscated by the tax department.
The bill also proposes to amend the Finance Act, 2012 to provide that the validation of demand, etc. under section 119 of the Finance Act, 2012 shall cease to apply on the fulfillment of specified conditions, such as the withdrawal of pending litigation and furnishing an undertaking to the effect that no claim for cost, damages, interest, etc. shall be filed.
In its objectives, the bill said, “Pursuant thereto, income-tax demand had been raised in 17 cases. In two cases assessments are pending due to stay granted by High Court. In two cases, the Arbitration Tribunal ruled in favour of the taxpayer and against the Income Tax Department [referring to the Cairn Energy and Vodafone cases].”
Why is the bill being introduced now?
The Taxation Laws (Amendment) Bill, 2021 is a major effort towards ensuring the principle of tax certainty in India, which has been long asked by foreign investors and multinational enterprises operating in India.
Moreover, the high profile Cairn Energy and Vodafone retrospective tax arbitration cases have done much damage to India’s reputation as a business-friendly jurisdiction, neutralizing gains made through bureaucratic reforms and the push to expand India’s industrial production and infrastructure upgrades.
India wants to settle the pending cases by the fiscal year end.
On December 21, 2020, the Indian government lost an international arbitration over the retrospective levy of taxes on Cairn Energy PLC. The three-person Hague-based tribunal, which includes an Indian representative, unanimously invalidated India’s claim of INR 102.47 billion in past taxes over a 2006-07 internal reorganization of Cairn’s India business. In a 582-page order, the tribunal stated that India had “failed to accord the Claimants’ (Cairn Energy’s) investments fair and equitable treatment” under its bilateral investment protection pact with the UK. The tribunal ordered India to return the value of shares it had sold, dividends seized, and tax refunds withheld to recoup the tax demand. The government was also asked to compensate Cairn “for the total harm suffered” along with interest and cost of arbitration. Based on this order, Cairn Energy has claimed that it has been awarded US$1.2 billion damages plus interest and cost. According to sources, this would be US$200 million of interest and US$20 million of arbitration cost, with the total amount payable by the Indian government US$1.4 billion (about INR 105 billion).
Prior to the Cairn Energy arbitration order, on September 25, 2020, the Netherlands-based Vodafone International BV won its international arbitration award against the Indian government’s retro tax demand of INR 221 billion. The international arbitration court ruled that the Indian government seeking INR 221 billion in taxes from the company using retrospective legislation was in “breach of the guarantee of fair and equitable treatment” guaranteed under the bilateral investment protection pact between India and the Netherlands. The Indian government’s liabilities – covering legal costs – are significantly less in this case since it did not take action to recover the retro tax demand from Vodafone.
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