The ‘The Taxation Laws (Amendment) Bill, 2021’ was notified in Aug 13, 2021. It withdraws the retrospective amendments on taxability of indirect transfers. The bill is an outcome of India’s long-time tax disputes with UK firms Cairn Energy PLC and Vodafone Group. Indian economy is regarded as one with a huge potential on the global platform holding a promising future for any business enterprise and thus, India’s tax policy needs to be clear, unambiguous and consistent

CA Sachin Kumar B P (Chief Strategic Partner, Manohar Chowdhry & Associates), in this article, analyses the amendments and some of the potential issues required to be addressed. He states that the retrospective amendment was brought in to nullify the SC’s judgement and raise demand on Vodafone which met widespread disapproval from stakeholders, and it was contended that such amendment was against the principle of tax certainty. He states that India had initiated proceedings under the 2012 amendment in case of 17 taxpayers including Cairn, New Singular Wireless, WNS Capital, Sanofi and SABMiller out of which lost to Cairn and Vodafone who took it to International Arbitration against Indian Government.

Mr. Kumar elucidates on the implications of the amendment and highlights that though the amendment seeks to bury the past disputes, it is not futuristic. However, concludes by saying “…India withdraws the retrospective amendment. This is a welcome step from the Government. Retrospective amendment after the Hon’ble SC’s judgement in favour of Vodafone was unfair and did not augur well for India’s image in the international arena”

Indirect Transfers – Impact of withdrawal of the retrospective amendment

Satyameva Jayate

The Indian Government introduces an Act to nullify the infamous 2012 retrospective tax amendment on indirect transfers with certain riders. What coerced the Indian Government to step back?

Though a welcome amendment, what would be the possible implications for taxpayers?

Read on….

On the global platform, the Indian economy is regarded as one with a huge potential. Its demographics and a burgeoning socially active young population hold a promising future for any business enterprise. Global companies are particularly interested in tapping this opportunity. To put it in simple terms, they just cannot ignore India. As a global economy, India’s tax policy needs to be clear, unambiguous and consistent not just for foreign players but even for the Indian taxpayers if we intend to Make India and Make in India Atmanirbhar.  

Since almost a decade, the world has been intently tracking the high-profile cases of Vodafone and Cairn in light of the amendment introduced by the Finance Act 2012, establishing the right to tax transactions between overseas entities in India if the underlying capital asset has situs in India. The fact that the amendments were introduced with a retrospective effect, i.e., applicable to the transactions which were executed and culminated even before the amendment, attracted the interest of prominent tax leaders worldwide who were waiting for the ultimate outcome.

The amendment drew ire of the Indian lawyers and practitioners, leave alone the international fora. The Taxation Laws (Amendment) Bill, 2021 (‘the Act’), passed by the Rajya Sabha on 9^th August 2021 and the Lok Sabha on 6^th August 2021, sees the Indian tax policy makers amend the law to capture what is right. It reinforces the Indian ethics of Satyameva Jayate or Truth Alone Triumphs.

In this article, we analyze some of the cases and amendments in brief and we’ve highlighted some of the potential issues which need to be taken care of.

Background

In Vodafone’s case[1], the Hon’ble Supreme Court held that the indirect transfer of shares of an Indian company by way of an overseas transaction between two non-resident entities was not taxable in India. The Indian Revenue amended the Income tax Act, 1961 retrospectively to nullify the SC’s judgement and raised a demand on Vodafone.

Likewise, the Indian Revenue Service had initiated proceedings under the 2012 amendment in case of 17 taxpayers including Mitsui, Genpact, Cairn, New Singular Wireless, WNS Capital, Sanofi, SABMiller and other companies.

In a major setback to the Indian Government in The Permanent Court of Arbitration at The Hague, Cairn won the award of USD 1.2 billion against the Indian Government. Cairn further claimed to have secured orders of the international courts to attach the overseas properties of Air India. The Indian Government also lost the arbitration case against Vodafone for INR 22,100 crore in the Singapore court.   

Why the amendment?

It is nobody’s guess that the Act has been introduced to protect the interest of the Indian Government from enormous claims made and the attachment of overseas properties initiated by Vodafone and Cairn in the international courts of arbitration. Besides the tangible losses, India also stands to lose out on the international platform when investors start considering other alternative destinations.

What is the amendment?

In simple terms, the Act seeks to nullify all the cases initiated against taxpayers which pertain to the period before 28th May, 2012[2], provided the taxpayers withdraw all their claims in the domestic and international courts/fora and provide an undertaking to the Indian government that no further claims, remedy or proceedings shall be initiated, either in India or overseas. The undertaking is to be made in a form and manner yet to be prescribed.

It sounds like a plausible end to tax litigation but in monetary terms the taxpayers stand to lose. The amendment specifically states that no interest will be paid to the taxpayers on refund due to them. The amendment makes no mention of compensating the taxpayers for the costs incurred by them in litigating for their rightful cause in the Indian and international courts, the lawyer’s fee and other incidental costs.

Implications of the amendment

The most direct impact of the amendment is that the taxpayers shall get a refund of the disputed tax of an estimated amount of INR 12,000 crore[3]. Interest and other claims shall have to be foregone by the taxpayers. The amendment does not mention the timelines within which the refund will be paid. It makes one wonder whether the Act is a reverse amnesty scheme.

The amendment applies to transactions which have taken place before the enactment of the Finance Act 2012 on 28^th May 2012. All transactions of indirect transfers after that date and in future would continue to be governed by the extant law on indirect transfers, whereby such transactions are taxed in India. The Indian Revenue Service rightly maintains its status quo on the tax policy that overseas transfers having underlying assets in India shall be taxed in India.

Whether this amendment would encourage foreign investors to make further investments in India or make India an attractive destination is doubtful. While the amendment seeks to bury the past disputes, it is not futuristic. It does not provide an undertaking that there will be no retrospective amendments in the future or that the tax policies will remain unchanged for the next ‘n’ years.

The amendment may be presented as an argument against certain retroactive amendments introduced by the Finance Act, 2021, viz. widening the definition of slump sale, disallowance of depreciation on goodwill and taxation of transactions on reconstitution of a firm, association of persons or body of individuals, which propose a substantial overhaul of the tax policy on transactions executed even before the amendment was introduced in the Parliament.  

Shri Nani Palkhiwala once said, “The Union of India has formed the disconcerting habit of legislating first and thinking later.” We fear the habit continues till date. While taxpayers develop innovative means of tax evasion, extracting the lost tax revenue through retrospective amendments in tax laws is certainly not the solution. International tax policies should be dynamic and pragmatic and, wherever possible must be developed after due consultation with the stakeholders.

In the case of retrospective amendments introduced in the year 2012, eminent Indian tax experts and lawyers, associations and international investors did make representations to the Revenue to retract the amendments. However, the amendments existed on statute till date, resulting in prolonged disputes, escalated costs of litigation and the unfolding of interesting tax developments which were globally watched with great interest.

Nevertheless, after more than a decade, though hesitantly, India withdraws the retrospective amendment. This is a welcome step from the Government. Retrospective amendment after the Hon’ble SC’s judgement in favour of Vodafone was unfair and did not augur well for India’s image in the international arena.

Better late than never.

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[1] Vodafone International Holdings B.V. v. Union of India [TS-23-SC-2012-O] reversing the Bombay HC ruling in [TS-46-HC-2008(BOM)-O].

[2] Finance Act 2012 received the President’s assent on 28^th May 2012.

[3] https://www.bloombergquint.com/business/tax-refunds-due-to-vodafone-cairn-and-others-once-retrospective-tax-is-amended