Govt buries retro taxes amid disputes, proposes refunds

NEW DELHI: In a bid to bury the ghost of retrospective taxation, the Union government on Thursday brought a bill in the Lok Sabha to withdraw all back tax demands on companies such as Cairn Energy and Vodafone and said it will refund the money collected to enforce such levies.

Finance minister Nirmala Sitharaman introduced The Taxation Laws (Amendment) Bill, 2021, in the Lower House, which seeks to withdraw tax demands made using a 2012 retrospective legislation to tax the indirect transfer of Indian assets.

The bill provides for the withdrawal of tax demand made on “indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e. the day the retrospective tax legislation came into being).” It also proposed to refund the amount paid in these cases without any interest.

The bill has a direct bearing on long-running tax disputes with British firms Cairn Energy Plc and Vodafone Group.

The Indian government has lost two separate arbitrations brought by the two companies against the levy of retrospective taxes.

While the government has virtually no liability in the Vodafone case, it has to refund $1.2 billion to Cairn Energy for the shares of the company it had sold, tax refund withheld and dividends confiscated.

The Bill states that the issue of taxability of gains arising from the transfer of assets located in India through the transfer of shares of a foreign company (indirect transfer of Indian assets) was a subject matter of protracted litigation.

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 Act.

But to circumvent this, the provisions of the Income Tax Act, 1961, were amended by the Finance Act, 2012, with retrospective effect, to clarify that gains arising from the sale of shares of a foreign company is taxable in India if such shares, directly or indirectly, derive their value substantially from assets located in India.

“Pursuant thereto, income-tax demand had been raised in 17 cases,” the objects of the Bill said.