Retrospective Tax On Indirect Transfers To Be Made Prospective: New Bill

This reads as a major step to resolve the highly litigated cases that arose from India's infamous "retrospective tax".

The North Block of the Central Secretariat buildings, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)
The North Block of the Central Secretariat buildings, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

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.

While the fineprint has yet to be fully analysed, this reads as a major step to resolve the highly controversial and litigated cases arising from India's infamous "retrospective tax" in 2012 that cast a wide net and caught transactions such as the Vodafone-Hutch deal and Cairn's internal restructuring, among others, in decade-long litigation.

The Taxation Laws (Amendment) Bill, 2021 proposes

  • No tax demand to be raised on the basis of 2012 retrospective amendment on indirect transfers of Indian assets.

  • Transaction should’ve taken place before 28th May, 2012.

  • The 2012 amendment to apply prospectively.

Where a tax demand has already been raised for transactions preceding 2012, the Bill proposes that such demand shall be nullified on fulfilment of specified conditions. These conditions include -

Withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed.

Importantly, the bill also proposes to refund the amount paid in these cases without any interest thereon.

This will being a lot of stability in the minds of foreign investors looking at investing in or entering India for the long run, said Amrish Shah, partner at Deloitte India.

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without any tax cost or penalty and to top it up providing for full refund of tax collected so long as the cases are withdrawn.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."

Why The Finance Ministry Wants To Amend India's Infamous Retrospective Tax On Indirect Transfers

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.

Tax Refunds Due To Vodafone, Cairn And Others Once Retrospective Tax Is Amended

Watch Ajay Rotti of Dhruva Partners explain the fine print of the proposed amendment.

Taken Note Of Retrospective Tax Changes Proposed By India, Says Cairn Energy