The government’s latest move to bury the controversial policy of retrospective taxation will relieve companies that were prior to 28) of the Income Tax Act. However, with the removal of the retrospective function, a clear and predictable right of taxation and intent was presented to companies that are expected to structure their assets appropriately when conducting business.
Experts said this deletion of the retrospective aspect now also provides clarity for business-to-business transactions from countries that do not benefit from tax treaties.
“The companies know that Section 9 has been changed in perspective to take into account the ruling of the Supreme Court in Vodafone. Any indirect transfer of assets where the underlying assets are located in India will be subject to Indian tax and accordingly they will arrange their assets. That is tax planning for the future. Going forward, the law change is now complete and you are arranging the assets in such a way that tax liability is kept to a minimum, ”said V. Lakshmikumaran, Managing Partner, Lakshmikumaran & Sridharan Attorneys.
The immediate beneficiaries would only be those who made their transactions before 2012, and from them the government will not collect the tax. And if they are collected they will refund it, he added.
Why was this tax introduced?
In 2012, the government retroactively amended the Income Tax Act. This was in response to a Supreme Court ruling finding that Vodafone was not taxable on a transaction in 2007 that involved the purchase of a 67 percent stake in Hutchison Whampoa.
The government has proposed amendments to the Income Tax Act and Finance Act 2012 to effectively stipulate that no tax claim may be made on indirect transfers of Indian assets if the transaction was conducted before May 28, 2012. The Indirect Transfer of Indian Assets Claim made prior to May 2012 will be paid upon the fulfillment of certain conditions such as: Section 9 (1) (i) of the Income Tax Act states that any income accruing or accruing outside India as a result of a business relationship in India is deemed to be accrued or accrued in India and in the case of all agents is taxable regardless of their residence status.
Companies are now expected to pull their litigation for transactions before 2012, experts said, adding that a definitive tax regime will help boost investor sentiment.
“You’re not saying the law was wrong. They are just saying that retrospectivity is wrong in the law, which they are taking back. Not much can happen in future planning, only the past has been corrected. There is no new law going forward … the companies have no reason to continue arbitration (for cases before 2012) because they got a successful deal. Whatever they said, the government has now agreed to it. You will benefit from the withdrawal of the litigation and will then be refunded taxes already paid or reimbursed in relation to adjusted claims. All of the money will flow back to them and the litigation costs will be stopped, ”said Neha Malhotra, Tax Partner, Nangia & Co.
The Indian government changed the income tax law retrospectively in 2012. This was in response to a Supreme Court ruling finding that Vodafone would not be taxed on a transaction in 2007 that involved the purchase of a 67 percent stake in Hutchison Whampoa for $ 11 billion can. Later in 2014, the government re-used the same section to file tax claims against Cairn Energy Plc for the 2006 restructuring. Following the retrospective amendment introduced by the UPA government in 2012, tax claims were made in 17 cases, of which tax was collected for four cases an amount of Rs 8,100 crore.