Govt releases draft of declaration to be given by companies to enable withdrawal of retro tax demands

Earlier this month, the government enacted the Taxation Laws (Amendment) Act 2021 to scrap a tax rule that gave the tax department power to go 50 years back and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India.

In a move that will aid closure of retro tax demands against companies such as Cairn Energy and Vodafone PLC, the Income Tax Department on Saturday released draft of rules to drop such demands provided companies concerned give an “irrevocable” undertaking to withdraw all legal cases against the government as well as undertake not to pursue any in future.

Earlier this month, the government enacted the Taxation Laws (Amendment) Act 2021 to scrap a tax rule that gave the tax department power to go 50 years back and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India.

That rule had been used to levy a cumulative of Rs 1.10 lakh crore of taxes on 17 entities, including Rs 10,247 crore on Cairn and Rs 22,100 crore on Vodafone.

Cairn was levied tax for a 2006 internal reorganisation of India business before listing while Vodafone was charged for not withholding tax from consideration it paid for acquiring Hutchison stake in India telecom unit.

Scraping such demands, the government undertook to refund Rs 8,100 crore it had collected from companies to enforce the retro tax demand. A bulk – Rs 7,900 crore – is due to Cairn Energy of UK alone. This was to be done only if the companies concerned gave an undertaking to withdraw all present legal challenges as well as not take such recourse in the future.

“The amendment made by 2021 Act also provides that the demand raised for offshore indirect transfer of Indian assets made before 28th May, 2012 (including the validation of demand provided under Section 119 of the Finance Act 2012) shall be nullified on fulfillment 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 and such other conditions are fulfilled as may be prescribed,” the tax department said in a statement.

The amount paid/collected in these cases shall be refunded, without any interest, on fulfillment of the said conditions, it said, adding a draft of the undertaking is being released for comments.

The declaration provides for “irrevocably withdraw, discontinue and not pursue” any present or future legal challenge against the tax demand.

Both Cairn and Vodafone had challenged the retro tax demand before international arbitration panels which ruled their favour. Other companies too have got relief from various Indian courts.

In the case of Cairn, the British firm was awarded USD 1.2 billion in claims for the value of its shares that were seized and sold by the tax department, dividend seized and tax refund withheld.

The government failed to pay and the company moved jurisdictions such as the US and France to recover the money due by seizing Indian assets.

The new law will require all the companies to withdraw Indian challenges and Cairn dropping its pursuits of Indian assets in the US, France and other foreign countries.

“The aim of the amendment made by the 2021 Act is to bring tax certainty and ensure that once specified conditions are fulfilled, the pending Income-tax proceedings shall be withdrawn, demand, if any, raised shall be nullified, and amount, if any, collected shall be refunded to the taxpayer without any interest,” the statement said.

To implement the amendment made by 2021 Act, draft rules have been prepared to amend the Income-tax Rules, 1962 which specify the conditions to be fulfilled and the process to be followed to give effect to the amendment made by the 2021 Act, it said.

“Suggestions/comments on the draft notification are invited from all stakeholders and the public and can be furnished electronically latest by 4th September, 2021.”

Nangia Andersen LLP Partner Sandeep Jhunjhunwala said in principle, the draft rule proposes that the taxpayer in whose case a specified order has been passed is required to irrevocably withdraw, discontinue and not to pursue any proceedings before the appellate forum, including proceedings for arbitration, conciliation or mediation and for enforcing or pursuing attachments in respect of any award, order or judgement.

“Interestingly, any dispute with respect to any of the prescribed forms or orders under these rules would be governed by the Indian laws and Indian courts would have the exclusive jurisdiction to decide disputes,” Jhunjhunwala added.

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