Putting an end to the contentious retrospective tax law that hit the confidence of foreign investors, including Vodafone and Cairn, for years, Finance Minister Nirmala Sitharaman on Thursday introduced a Bill in Parliament to nullify the provision in the Income Tax Act.
The government has also proposed to refund the amount paid in litigation by companies without any interest thereon. Finance Secretary T V Somanathan told Business Standard that the total amount involved for all cases is about Rs 8,100 crore, of which about Rs 7,900 crore is related to the Cairn dispute.
The Bill would withdraw the retrospective amendments to the Income Tax Act that had raised demands on Vodafone, Cairn and some others, indicating a move to attract foreign investments.
This comes soon after Aditya Birla Group Chairman Kumar Mangalam Birla offered to transfer the group’s ownership in Vodafone Idea to the government in a last-ditch effort to keep the cash-strapped telco from collapsing. Vodafone plc has maintained it would not throw good money after bad.
Sitharaman said the country was at a juncture when quick recovery of the economy was the need of the hour. Foreign investment would play an important role in promoting faster economic growth and employment, she added.
“It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination,” the statement on the objects and reasons of the Bill reads.
“There is Vodafone, which is Rs 45 crore, there is WNS Capital, which is about Rs 48 crore. There is also some collection from another company, but that company has already come under Vivad se Vishwas scheme,” he said. In the case of Vodafone, while the total tax demand (including interest and penalty) was Rs 22,000 crore, the government is accounting for Rs 45 crore spent by the telco towards legal fee etc. Vodafone had won the case in the international arbitration tribunal last year, against which the Indian government appealed. The appeal is likely to be withdrawn now.
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LOSING BATTLE
- India’s imposition of a tax liability on Vodafone breached an investment treaty between India and the Netherlands, ruled an international arbitration tribunal last year
- Cairn was awarded damages of more than $1.2 billion in December by the Permanent Court of Arbitration at The Hague in retro tax case
- A French tribunal last month ordered a freeze on some 20 properties belonging to Indian government as part of a guarantee of the amount owed to Cairn
“Reversing the 2012 retrospective law on indirect transfers of downstream assets in India is a welcome development. Honouring the arbitration award is a step in the right direction and a clear signal to foreign investors that tax certainty will be the order of the day going forward,” said Fereshte Sethna, counsel for Vodafone Group Plc
The bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand would be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012, the date on which the Finance Bill, 2012, received the assent of the President, says the statement of objects and reasons of the legislation.
“It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before May 28, 2012, shall be nullified on fulfilment of specified conditions such as 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,” it said.
Somanathan said the government had been seeking a methodology , which preserves the principle of India’s right to tax, but it has no interest in pursuing something, which we do not consider to be a good policy since 2014.”
Vodafone Group CEO Nick Read in a July 23 analyst call, said that Vi was navigating through difficult times and although the group was providing “practical support”, it will not invest fresh equity.
The Vodafone case relates dates back to the telco acquiring Indian assets of Hutchison Essar in 2007. The demand amounted to Rs 22,100 crore. The government had filed an appeal against the verdict in Singapore. Similarly, India had lost a case in international arbitral tribunal at The Hague last year against taxing Cairn Energy Plc and Cairn UK holdings Ltd on alleged capital gains the company made when in 2006 it reorganised its business in the country before listing of the local unit.
The tribunal had asked India to pay Cairn an award amount of $1232.8 million plus interest and $22.38 million towards arbitration and legal costs. The government had filed an appeal earlier this year to set aside the award.
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Somnathan said Cairn will have to follow the procedure under the new law. “I think it makes imminent sense now to all parties concerned in all these disputes to withdraw cases as we have reached a very reasonable termination of this problem. But reached it through Indian sovereign action,” he said.
Experts lauded the government’s move. “This will put a lot of uncertainty to rest. However, it should not have taken nine years,” Amit Maheshwari, tax partner of Ashok Maheshwari & Associates, said.
Somnathan said the bill was in the works for a long time. It has taken time to draft, he pointed out. Pranav Sayta, tax partner, EY, said the development recognises the importance of certainty in tax laws which is key factor in ensuring confidence in India as an attractive investment destination.
Tax expert Mahesh Bhutani said it is a comprehensive amendment which covers Vodafone, Cairn form of situations which have been or are being litigated. The issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company was a subject matter of protracted litigation. Finally, the Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Income Tax Act.
The then UPA government amended provisions of the Income-tax Act, 1961, through the Finance Act, 2012, with retrospective effect, to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India.