August 11, 2021
India proposes to remove retrospective applicability of indirect transfer tax regime
The Indian Government introduced The Taxation Laws (Amendment) Bill, 2021 (the Bill)1 on 5 August 2021 to withdraw the retrospective application of the indirect transfer tax provisions. Upon enactment of the Bill as Law, indirect transfer tax provisions shall apply only on transactions occurring on or after 28 May 2012 (the “specified date”). Indian tax demands pertaining to indirect transfers for earlier tax years will be nullified; all pending assessments cancelled and taxes previously collected on the basis of prior demand orders will be refunded.
This Alert summarizes the Bill and implications for taxpayers.
The issue of the taxability of gains arising from the transfer of shares of a foreign company deriving substantial value from assets in India (indirect transfer) was a subject matter of intense litigation in India until 2012. The apex court of India2 in a landmark 2012 judgment3 settled litigation in favor of the taxpayer.
Immediately after the judgment, the Indian Government introduced certain “clarificatory” changes to the Income Tax Laws (ITL) providing that the transfer of shares or interests in a foreign entity were taxable in India, if such shares derive substantial value from assets located in India. These clarificatory changes were applicable with retroactive effect from 1 April 1962. Pursuant to this amendment, the Indian Tax Authority sought to sustain its earlier tax assessments or issued new tax assessments in 17 cases resulting in huge tax demands. Some of the taxpayers initiated international arbitration under the Bilateral Investment Protection Agreements (BIPAs), a couple of which were concluded and awarded against the Indian Government.
The amendments made by the Finance Act 2012 giving retrospective effect to the indirect transfer taxation provisions resulted in criticism from various stakeholders as it worked against the objective of the Indian Government to provide tax certainty and damaged India’s reputation as an attractive investment destination. The retrospective amendments and the subsequent international arbitrations have had an adverse impact on India’s image as an investor-friendly jurisdiction.
Proposals of the Bill
Provisions relating to assessment and penalty orders in respect of income arising from indirect transfers undertaken prior to the specified date
Refund upon cancellation of assessment/inapplicability of notices issue
The withdrawal of the retroactive effect of the indirect transfer tax provisions is a welcome move for taxpayers. However, it is subject to conditions such as the withdrawal of pending appeals, writs and special leave petitions, arbitration, mediations, and conciliations (if any) initiated by the taxpayer. In addition, the taxpayer is required to give an undertaking waiving all of the taxpayer’s rights to pursue any claim or remedy under any other law in force.
Taxpayers who wish to avail of the benefits of the proposals under the Bill will need to weigh their options and determine an appropriate course of action. Taxpayers will need to carefully evaluate the trade-off between enforcing the arbitral award comprising damages and interest in addition to tax and complying with conditions prescribed in the Bill to have any demands annulled and/or refund of principal amount of tax without interest.
Further, taxpayers who may have already settled their disputes under the Vivaad Se Vishwas Scheme (VSV) may face difficulty in claiming any refund under the proposed Bill since no refund is available for payments made under the VSV.
As a legislative process, the Bill must be approved by the President of India before it gets enacted as a law.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
Ernst & Young LLP (India), Bangalore
Ernst & Young LLP (United States), Indian Tax Desk, New York
Ernst & Young LLP (United States), Indian Tax Desk, San Jose
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York