The Indian Government, in a major move, has presented a bill in the Parliament today to settle the matters relating to capital gains tax on indirect transfers which are in litigation or in arbitrations.
In the year 2012, the Indian tax department faced a major setback when the Hon’ble Supreme Court of India gave a favourable ruling in favour of Vodafone International Holdings B.V.1 wherein it was held that acquisition by Vodafone of Hutchison Essar, which was done through overseas entity, would not attract any capital gains as the transfer was made outside India and consequently Vodafone was not required to withhold any tax. The parliament amended the relevant law in the same year wherein such a transfer (popularly called ‘Indirect Transfer’) was made taxable retrospectively and consequently the demands were again made to Vodafone for recovery of tax. Similar demands were made in several other cases.
Various MNCs which got such orders didn’t took this favourably and resorted to international arbitration under the respective Bilateral Investment Agreement (BIT). The Indian government maintained that such arbitration awards are not binding as BITs are not intended to encroach upon the sovereign power of tax collection of a country. The Indian government had recently lost some of these arbitrations.
Due to much global criticism and the aggressive stance of some MNCs, the Indian government has decided to settle these matters and presented a bill to make this taxation of indirect transfer prospective and therefore not collect the taxes in such matters. They will refund the taxes if already collected. The salient features of the tax proposal are discussed below.
a) Such transactions which are carried before 28th May, 2012 shall be out of ambit of the taxation under indirect transfer provisions.
b) No order shall be passed in future or in existing proceedings to include any income pursuant to indirect transfer.
c) In cases where the assessments have already been completed including such income, the effect of addition of such income shall be nullified.
d) If any refund becomes due to the taxpayer, the refund shall be paid but without any interest.
However, in cases covered in (c) and (d) above, the concerned taxpayer will need to fulfil certain conditions mentioned below.
