The finance ministry has proposed an important amendment to the income tax law that proposes to make the levy of tax on indirect transfers prospective. Past cases where the tax has been levied retrospectively may also find resolution via the new bill.
For the existing disputes on indirect transfer, the government has been pragmatic in allowing them to be settled without any tax cost or penalty and to top it up providing for full refund of tax collected so long as the cases are withdrawn. The only sore points that no interest would be paid on such tax refunds. On balance, this is a really good step.Amrish Shah, Partner, Deloitte India
The amendment bill is a welcome move and hopefully, takes the government’s resolve to address its stand on retrospective amendment to its logical conclusion, Mukesh Butani, managing partner at BMR Legal, pointed out.
But one situation which continues to remain unaddressed are cases where notices were issued but no tax demand was raised. It's unclear what'll happen to those cases as the focus of this Bill is on demands. The Bill should specify whether those proceedings will automatically be dropped.Mukesh Butani, Managing Partner, BMR Legal
The amendments also deal with situations where penalty proceedings have been initiated and they would stand nullified even in situations where demand has been raised, Butani said.
This is a welcome step, said Pranav Sayta, tax partner at EY. "It recognises the importance of certainty in tax laws which is a key factor in ensuring confidence in India as an attractive investment destination."
Also Read: Bye, Bye Retro Tax: Why, How, When
The tax on indirect transfers were introduced by the UPA government in the Finance Act of 2012 as a clarification to existing tax law, with retrospective effect from 1962. It intended to bring to tax numerous offshore transactions involving Indian assets.
Besides the Vodafone-Hutch transaction and Cairn's internal restructuring, there were 15 other transactions that faced retro levies, according to finance ministry data. These cases, involving foreign investors in India, damaged the country's reputation as an attractive destination, the ministry said in the statement accompanying the bill.
"The country today stands at a juncture when quick recovery of the economy after the Covid-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment," the statement said.
It has taken the Modi-government seven years to undo a tax law that it claimed never to have supported. The timing may not be just Covid-related.
In the last year, both Vodafone and Cairn, the two most controversial cases pertaining to this tax, were lost by the Indian government and both companies were seeking to actively enforce the international arbitral awards. Last month, Cairn moved a French court to freeze Indian government assets in the country in lieu of the damages it is owed. It has dragged Air India to a U.S. court to the same end.
Watch Ajay Rotti of Dhruva Partners explain the fine print of the proposed amendment.
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