Retrospective Tax – Draft rules: Vedanta has to withdraw Singapore Cairn case for refund

This would mean that Vedanta has to undertake to withdraw the arbitration filed under India-Singapore tax treaty for Cairn Energy to avail of the facility offered by New Delhi.

The government on Saturday issued a set of draft rules to implement the recent amendment to the Income Tax Act that scrapped retrospective application of a 2012 change in the law concerning taxation of cross-border transactions.

As per the rules, in order for the government to revoke the tax demand and refund the amounts collected sans interest, the party concerned not only has to withdraw all pending litigation in domestic courts and arbitration under bilateral investment treaties filed abroad, but also ensure that cases filed by any ‘separate interested parties’, including beneficial owners, are withdrawn. This would mean that Vedanta has to undertake to withdraw the arbitration filed under India-Singapore tax treaty for Cairn Energy to avail of the facility offered by New Delhi.

The draft rules also state that disputes with regard to the prescribed undertakings or orders under the rules would be governed by the Indian laws and that Indian courts would have the exclusive jurisdiction to decide on any disputes that might arise.

Suggestions/comments on the draft rules can be made till September 4.

The amendment passed by Parliament in the monsoon session provided that the demand raised for offshore indirect transfer of Indian assets made before May 28, 2012 (including the validation of demand provided under Section 119 of the Finance Act 2012) shall be nullified on fulfillment of specified conditions.

The move notionally involved a scaling down of New Delhi’s tax revenue ambitions by at least Rs 1.1 lakh crore.

Also, the amendment legislatively sanctioned that no tax demand will be raised in future on the basis of the 2012 retrospective amendment for any indirect transfer of Indian assets. Of course, the capital gains tax on indirect transfer will continue to apply for all transactions post the 2012 amendment.

In the Cairn case, Vedanta has sought compensation close to Rs 5,000 crore under the India – Singapore investment treaty for significant decline in share value owing to the Rs 10,250 crore tax notice to its the then subsidiary Cairn India. Cairn India later merged with Vedanta.

Though there are as many as 17 retrospective tax cases, the most prominent ones are those involving Vodafone and Cairn. India in January 2013 slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest. This was in February 2016 updated to Rs 22,100 crore plus interest.

The country also slapped an assessment of Rs 10,247 crore on Cairn Energy in January 2014, which after including penalties came to Rs 20,495 crore.

Both Vodafone and Cairn secured international arbitration orders in their favour in September and December 2020 respectively.

While moving the changes in the recent Parliament session, the FM described the 2012 legislation as both ‘bad in law’ and ‘bad for the investors’ sentiments.’ She said the government’s move was towards fulfilment of the promise made by the ruling BJP, PM Narendra Modi and former FM Arun Jaitley as early as in 2014, that the controversial piece of legislation introduced by the UPA-II government in 2012 would be reviewed, as “we don’t believe in retrospective taxes.”

However, the NDA government had been seen pursuing these tax cases aggressively; it even raised Rs 7,900 crore from Cairn by seizing and selling the UK-based energy company’s stake in its erstwhile India unit, confiscating dividends and withholding refunds.

“The draft forms also contemplate a situation where a separate interested party such as direct or indirect shareholders, or any other beneficial owner of the taxpayer in whose case these proceedings are ongoing, may bring or file any claim against the Republic or Indian affiliates at any time after filing the undertaking. In such cases, the taxpayer is required to indemnify and defend the Republic or Indian affiliates against any and all costs,” said Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP.

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