Retrospective Tax: Refunds Due To Vodafone, Cairn If They Accept Conditions
The proposal to amend the 2012 retrospective tax on indirect transfers will cost the government at least Rs 12,000 crore in refunds, according to an estimate provided by a Finance Ministry official to BloombergQuint. This amount pertains to just two cases, Vodafone Group Plc and Cairn Energy Plc. The impact regarding the remaining 15 cases is not clear yet.
The Finance Ministry has introduced a bill to amend the income tax law and reverse the impact of the tax on indirect transfers that was levied in 2012 with retrospective effect from 1962. The tax will only be levied prospectively, the bill proposes, on transactions undertaken after May 28, 2012. Any demands raised on pre-2012 transactions will be nullified subject to certain conditions.
The 2012 change in tax law had led to income tax demands raised in seventeen cases, according to the bill document. It mentioned no names.
In two cases assessments are pending due to court stays.
In four cases international arbitration was invoked under bilateral investment treaties.
In two cases, the Arbitration Tribunal ruled in favour of the taxpayers.
These two cases are of Vodafone and Cairn whose legal victories in the past year over the tax department have revived the controversy around the retrospective tax. Both have sought to enforce the international arbitral awards, Cairn even moving international courts to take over Indian government assets abroad in lieu of damages it won.
Once the The Taxation Laws (Amendment) Bill, 2021 is passed, if the two U.K.-based companies agree to withdraw all pending litigation and agree to make no claim for cost, damages, interest, then the tax collected from them can be refunded, as per the bill's provisions. That amount is Rs 12,100 crore, according to a government estimate.
Certain conditions have to be met to resolve pending cases, reiterated Tarun Bajaj, revenue secretary in the Finance Ministry, to BloombergQuint.
"They will only get the principal amount, they will have to withdraw cases, and give an undertaking. The principal amount for Cairn is around Rs 7,600 crore and for Vodafone is about Rs 4,500 crore. Basically, they have to comply with these conditions and then it is all over."
The Back Story ... In Brief
Indirect transfers, or the transfer of assets located in India through the transfer of shares of a foreign company, became a contentious tax matter when the global financial boom in 2000s led to a flurry of M&A activity involving Indian assets as well. Many of these assets, such as in the case of the Vodafone-Hutch transaction over an Indian telecom business, were owned by offshore companies and hence were claimed to be not subject to tax in India.
When the tax department failed to win its case to tax the Vodafone-Hutch transaction the government of the day (UPA) sought to amend the income tax law to add a clarification that such indirect transfers would be subject to tax in India. The clarification applied retrospectively, from 1962.
The retrospective levy of the tax impacted several transactions undertaken prior to 2012 and led to intense litigation. Yet, even a new government under Prime Minister Narendra Modi did not move to amend the law till now.
'It is argued that such retrospective amendments militate against the principle of tax certainty and damage India's reputation as an attractive destination," says the statement of objects and reasons accompanying the bill.
It explains why the government has moved now...
◾ In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country.
◾ However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors.
◾ 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.
There have been no retrospective tax demands since 2014, Principal Economic Adviser Sanjeev Sanyal told BloombergQuint. “The existing cases were all inherited and the legal process was allowed to go to its logical end. And now this Bill reverses the action of 2012, and we expect the whole matter will be resolved.”
"We are sending a message to the investor community that India does not believe in retrospective taxation," Bajaj said.
As yet, Vodafone has not commented on the bill and its implications. A Cairn statement said it has noted the introduction of the Taxation Laws (Amendment) Bill 2021 and will provide a further update in due course.