The center does away with the retrospective aspect of the Indirect Transfer Taxation of Indian Assets Act, paves the way for resolving lengthy litigation with Vodafone Group and Cairn Energy, among others, and removes a major hurdle for foreign investment. The government introduced a corresponding bill in parliament on Thursday, marking the start of an important reform.
Once the law has been passed, the provisions of the law will only apply from May 28, 2012, the date of the President’s approval.
The bill will withdraw all back tax claims made under the law, allow the government to refund collected taxes, and resolve cases when companies withdraw lawsuits filed on all legal forums. There are 17 cases of such retroactive application of law in which claims have been made. In two cases there was a stay by the highest courts, while in four cases arbitration was initiated under contracts with the United Kingdom and the Netherlands.
Bold step, say experts
In four of them the government has collected 8,089 crore in taxes, including 7,880 crore from Cairn.
Treasury Secretary Nirmala Sitharaman presented the Taxation Laws (Amendment) Bill 2021 on Thursday to amend the Income Tax Act 1961 and the Finance Act 2012. Tax claims made on Indirect Transfer Transactions of Indian Assets prior to May 28, 2012 will be canceled as long as the conditions are met, the bill states.
“This retrospective clarification and the resulting requirement that was created in some cases is still a sore point for potential investors,” said Sitharaman in the reasoning presented with the bill. “The country is now at a point where rapid economic recovery from the Covid-19 pandemic is the order of the day and foreign investment plays an important role in promoting faster economic growth and employment.”
Vodafone Group and Cairn Energy won international arbitration awards against the government last year. Cairn then filed lawsuits in multiple jurisdictions to enforce the arbitration award and has even pinned 20 Indian properties in Paris. India has appealed against arbitral awards in Singapore and the Netherlands.
Experts welcomed the move, calling it brave, which will bring stability and alleviate concerns from overseas investors, and urged companies to resolve cases.
“Obviously, this is a big positive signal for foreign investors to continue to trust the stability and security of tax laws in India,” said Sudhir Kapadia, Head of Taxes at EY. “It seems like a good opportunity for the taxpayers concerned to resolve any past disputes and avoid future litigation costs, although they may have to forego interest and damages.”
India will withdraw appeals against arbitral awards in the Vodafone, Cairn and other cases and release the tax of Rs 8,089 crore collected so far only if it undertakes to withdraw the litigation in all forums and agrees to other specific terms.
Disputes in the Supreme Court, Supreme Court or other fora, including arbitration, arbitration or mediation under any contract, must be withdrawn. Companies should also undertake not to charge any costs, damages or interest. Companies must also waive their rights to assert claims.
No company, including Cairn, has made a formal settlement proposal, an official said.
The government will pay Cairn 7,880 billion rupees, Vodafone 44.7 billion rupees, New Cingular Wireless 119 billion rupees and WNS Global 47 billion rupees after collecting this as tax from them.
Vodafone UK made no comment. Cairn did not respond to inquiries.
The law will also put an end to the assessment cases opened by the tax department that are pending in various higher courts and in arbitration proceedings.
“With this proposal, the tax department will not treat the named appraisers as defaulting as long as the pending litigation is withdrawn. This effectively resolves the dispute, ”said Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co.
Positive for investment
The retroactive tax changes introduced in May 2012 have been criticized by stakeholders for violating the principle of tax security while damaging India’s reputation as an attractive travel destination, despite major reforms in the financial and infrastructure sectors in recent years, the government said in the justification for the draft law.
“Reversing the retrospective change in indirect transfer taxation is a welcome move and would reinvigorate the choice of India as a cheap investment destination combined with low tax rates,” said Amrish Shah, partner at Deloitte India.
India had cut corporate tax to 15% for new businesses, including manufacturing companies, and 22% for those who gave up all exemptions and incentives in September 2019, up from 30% it had previously attracted.
The government said it was making the changes to provide tax security for potential investors. Investing abroad is seen as key to accelerating economic recovery and job creation after the damage caused by Covid-19.
The Bharatiya Janata Party (BJP) opposed the retroactive nature of the law, but did not repeal it after it came to power in 2014. In his first budget speech on July 10, 2014, former Treasury Secretary Arun Jaitley said: the government’s sovereign right to legislate retrospectively was undisputed. But “this power must be exercised with the utmost caution and prudence, taking into account the impact of each of these measures on the economy and the general investment climate,” he said.
At the Economic Times Global Business Summit in February 2018, Jaitley had said: “I have always seen Vodafone’s tax decision as a wrong decision … This government will not make a retroactive decision.”