The Ministry of Finance on Thursday proposed an amendment in the Income Tax Act to withdraw retrospective tax demands made on indirect transfer of Indian assets prior to May 28, 2012.
The retrospective tax, introduced in 2012, allowed the government to ask companies to pay taxes on mergers and acquisitions that happened before May 28 that year.
The tax has been at the centre of disputes between the Indian government and firms like Vodafone and Cairn Energy. Both firms had won international arbitrations against the levy of retrospective taxes on them.
The amendment proposed by Finance Minister Nirmala Sitharaman on Thursday effectively nullifies all retrospective tax demands made on transactions before 2012 on the fulfillment of some conditions. These conditions include withdrawal of pending litigation and an undertaking that no damages claims would be filed by the firms who have been levied the tax.
The Bill also proposes to refund the amount of taxes paid in these cases without any interest.
The Bill came less than a month after reports suggested that a French court had seized the Indian government’s properties in Paris in connection with the Cairn Energy tax dispute case. The government had, however, said that it had not received any “notice, order or communication” from any French court.
Vodafone tax dispute case
The tax dispute involving Rs 12,000 crore in interest and Rs 7,900 crore in penalties began after Vodafone’s acquisition of the Indian mobile assets from Hutchison Whampoa in 2007. The Indian government insisted that Vodafone pay taxes on the acquisition, which the company refused.
In 2012, the Supreme Court of India ruled in favour of Vodafone. However, the government changed the rules to enable it to tax agreements that had already been concluded. Subsequently, in 2014, Vodafone initiated arbitration proceedings against India. Vodafone contended that the demand for paying taxes violated the principles of equitable and fair treatment under the India-Netherlands treaty.
In September, the international arbitration tribunal in The Hague ruled that the tax liability imposed by India breaches the India-Netherlands Bilateral Investment Treaty.
Cairn Energy tax dispute case
In December, the international arbitration tribunal in The Hague ruled that India’s demand of Rs 10,247 crore in past taxes was not valid. The retrospective tax demand was on alleged short-term capital gains that Cairn had made when it transferred ownership from Cairn UK Holdings to Cairn India in 2006.
The tribunal also ordered India to pay $1.2 billion (over Rs 8,715 crore) in damages along with other costs to Cairn Energy.