On August 6, 2021, share price of Vodafone Idea Limited witnessed 20% surge, pursuant to introduction of the Taxation Laws (Amendment) Bill, 2021 (‘the Bill’) by the Finance Ministry in the Lok Sabha on August 5, 2021, which received the Presidential assent on August 13, 2021, vide, the Taxation Law (Amendment) Act, 2021 (‘The Amendment Act’).
The Amendment Act amends the retrospective applicability of the tax on indirect transfers that was levied vide Finance Act 2012 with effect from 1962. Such withdrawal of retrospective amendment entails the refund of INR 12,000 Crores collected by the Government of India from various international transactions including Vodafone Hutch deal and Cairn Energy Deal.
Indirect Transfer Tax – Saga
Vide the Finance Act, 2012, the concept of Indirect transfer tax was introduced retrospectively, in order to impose capital gains in India from the international transaction involving transfer of shares or interest of an entity incorporated outside India which effectively derives value substantially from the assets located in India (‘the Retrospective Amendment’).
The Retrospective Amendment was introduced immediately after the Supreme Court verdict in the case of Vodafone International Holdings B.V[1] (‘Vodafone’). The apex court had ruled that in absence of a ‘look-through’ tax provision, gains arising on transfer of shares of a foreign company, being an asset situated outside India, are not taxable in India.
The most controversial part of the Retrospective Amendment was that it was introduced as an amendment which clarified that this was the position all along since 1961 and it was not a substantive change to the tax provision. So, effectively, any the transactions closed prior to 2012, were also hit adversely and under the scanner of revenue department. Companies majorly affected by such a Retrospective Amendment were Vodafone and Cairn U.K. Holdings Limited (‘Cairn UK’).
In the case of Vodafone International Holdings B.V.(‘Vodafone’), Vodafone had acquired shares of a Cayman based company, which indirectly held a majority stake in an Indian company, from Hutchison Telecommunications International Limited. The transaction was closed in 2007, and Vodafone was treated as a defaulter for not withholding tax in India on such an acquisition. Despite the apex court deciding in favour of Vodafone, the Retrospective Amendment reopened the tax dispute and the government kept chasing Vodafone for the tax demand of INR 20,000 crores (approx.), including interest and penalties.
In the case of Cairn U.K. Holdings[2], it had transferred shares of its Jersey-based subsidiary, Cairn India Holdings Limited to its Indian subsidiary, Cairn India Limited, as part of an internal restructuring. The tax authorities held such transaction to be taxable in India and raised a tax demand of INR 24,500 crores (approx.).
Both Vodafone and Cairn UK filed slew of lawsuits against the Union Government in the International courts and the Permanent Court of Arbitration in the Hague by invoking India’s Bilateral Investment Protection Treaties with Netherlands and UK, respectively, alleging that the Retrospective Amendment violated the Article 4(1) which dealt with fair and equitable treatment provided under the two separate Bilateral Investment Treaties. The Arbitral Courts in both cases observed that India had breached the investment treaties which provide that, investors of each country must be accorded fair and equitable treatment and they must enjoy full protection and security in the territory of the other party, at all times. The Arbitration Courts issued verdicts in favour of Vodafone and Cairn UK and directed that India needed to stop collecting the taxes, directing the Government of India to return the legal costs of the companies as well as all taxes collected in this respect. However, Indian Authorities refused to follow the ruling of the Arbitration Courts.
These Retrospective Amendment was uncalled for and created chaos as it penalised many businesses for actually applying taxation laws correctly. The shock created by the Retrospective Amendment became a negative spotlight for India and caused much damage to India’s reputation shaking investor confidence in the Indian tax environment which, since then, was being viewed as uncertain by the international communities. The Retrospective Amendment not only was considered as the one inflicting tax terrorism but also created reputational damage for India for creating tax uncertainty as an investment destination.
Provisions of the Amendment Act
The Amendment Act provides for the withdrawal of the Retrospective Amendment, thereby nullifying the adverse effect of such Retrospective Amendment on all the transactions entered prior to May 28, 2012 upon fulfilment of certain conditions such as the withdrawal or furnishing of an undertaking for the withdrawal of pending litigation and the furnishing of an undertaking to the effect that no claim for cost, damages, or interest will be made.
Accordingly, all pending assessments shall be deemed to have been concluded without additions for such income. For the cases where tax has already been collected, refund shall be made to the extent of principle amount of the such taxes paid by tax payers. However, the taxpayers will lose interest on the tax demands that were already deposited by them during the proceedings.
According to the Income Tax Act, non-residents are obligated to pay tax on income earned via or originating from any business relationship, property, asset, or source of income in India. The 2012 Act stated that if a business is formed or incorporated outside India, its shares are assumed to be or have always been located in India if they derive a significant portion of their value from assets located in India. As a result, anybody who sold such foreign company shares before the Act’s passage (i.e., before May 28, 2012) became subject to pay tax on the profit derived from the sale.
It is also proposed to provide that any demand for the indirect transfer of Indian assets made prior to May 28, 2012, will be null and void upon the fulfilment of certain conditions, such as the withdrawal or furnishing of an undertaking for the withdrawal of pending litigation and the furnishing of an undertaking to the effect that no claim for cost, damages, or interest will be made.
The abolition of retrospective applicability of indirect transfer tax, although a delayed move, but is a welcome move by the Government of India. This is surely a positive move towards creating certainty in the tax laws in India and would surely play a role for promoting faster economy growth and employment by attracting foreign investment into India. The Amendment Act rectifies the legal position for amendment of taxation laws and is in line with the latin maxim ‘lex non cogit ad impossibilia’, i.e., the law does not demand the impossible, and ‘impotentia excusat legem’, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused as reiterated by apex court in case of Engineering Analysis Centre of Excellence Private Limited[3].
However, the Amendment Act may not compensate for the losses suffered owing to the international transactions in many cases as refund amount does not include interest component. The costs incurred for litigations at various Arbitral courts are out of question to be recovered. Also, considering the commercial angle to the entire saga, the refund amount is ought to be much lower than the present value of taxes and various costs that are been incurred and paid by the taxpayers.
For more detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
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[1] Vodafone International Holdings B.V v Union of India ([2012] 1 S.C.R. 573)
[2] Cairn U.K. Holdings v. DCIT (International Tax) (Delhi ITA no. 1669/Del/2016)
[3] Engineering Analysis Centre of Excellence Private Limited and Others v. The Commissioner of Income Tax and Anr
