Govt issues draft rules to end retrospective tax
The controversial amendment was made about nine years ago. The amendment was made after the Supreme Court in 2012 ruled that gains arising from indirect transfer of Indian assets were not taxable under the extant provisions of the Income-Tax Act
The Centre on Saturday released draft rules including preconditions for withdrawing retrospective tax demands on aggrieved investors such as Cairn Energy Plc and Vodafone Plc, provided they “irrevocably” withdraw all existing cases against the government and furnish an “undertaking” that they would not initiate any legal action to claim costs, damages or interest in future.
The draft was put up for public suggestions and comments from all stakeholders by September 4. After the deadline, the rules will be finalised by incorporating relevant suggestions to operationalise the Taxation Laws (Amendment) Act, 2021 that was enacted during the monsoon session of the Parliament earlier this month, a finance ministry official said requesting anonymity.
The Act was passed to alter “a clarificatory amendment” that was brought in by the Congress-led United Progressive Alliance (UPA) government in 2012 and had become contentious because of its retrospective application. The retrospective amendment had resulted in 17 legal cases, including two of arbitration by Vodafone Plc and Cairn Energy Plc in foreign tribunals. India lost both last year.
“To implement the amendment made by 2021 Act, draft rules have been prepared to amend the Income-tax Rules, 1962 which specify the conditions to be fulfilled and the process to be followed to give effect to the amendment made by the 2021 Act,” the finance ministry said in a statement.
The Act was amended to “bring tax certainty and ensure that once specified conditions are fulfilled, the pending income-tax proceedings shall be withdrawn, and demands, if any, raised shall be nullified, and the amount, if any, collected shall be refunded to the taxpayer without any interest”, it said.
Vodafone and Cairn did not respond to queries seeking their comments on this development.
The controversial amendment was made about nine years ago. The amendment was made after the Supreme Court in 2012 ruled that gains arising from indirect transfer of Indian assets were not taxable under the extant provisions of the Income-Tax Act.
“The idea is, a sovereign government has the right to tax, but to apply it in retrospect has created a lot of discontentment,” finance minister Nirmala Sitharaman told the Rajya Sabha on August 9 during a discussion on the Bill.
The amendment bill was moved on August 5 in the Lok Sabha and passed the next day. The move is widely seen as investor friendly and also brings to an end messy litigation and arbitration, especially with Cairn, which has seen the company staking claim to India’s overseas assets.
The legislation proposes to amend the I-T Act, 1961, and the Finance Act, 2012, amended during the tenure of then finance minister Pranab Mukherjee to introduce the retrospective tax law, which has since come to stand for all that’s bad in India’s tax regime.
Ritesh Kumar S, executive director of IndusLaw said: “The approach adopted by the government in drafting the undertaking under the rules seems to be drawn from the two arbitration awards that have been secured by Vodafone and Cairn (respectively). The release from attachment of assets to enforce the order particularly appears to be stemming from the Cairn experience.”
In July this year, Cairn was successful in its application to the French court, Tribunal judiciaire de Paris, to freeze (through judicial mortgages) residential real estate owned by the government of India in central Paris.
To date, London-listed Cairn is pursuing the Government of India in multiple jurisdictions, primarily focused on regions with high-value assets, such as the US, the UK, Canada, Singapore, Mauritius, and the Netherlands.