{"id":255214,"date":"2021-10-06T11:30:07","date_gmt":"2021-10-06T06:00:07","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=255214"},"modified":"2021-12-17T11:13:56","modified_gmt":"2021-12-17T05:43:56","slug":"india-and-retrospective-tax-on-indirect-transfers-burying-the-hatchet","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2021\/10\/06\/india-and-retrospective-tax-on-indirect-transfers-burying-the-hatchet\/","title":{"rendered":"India and Retrospective Tax on Indirect Transfers: Burying the Hatchet"},"content":{"rendered":"
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<\/a>Indian tax law is routinely amended by the Parliament. While well-reasoned amendments serve as a tool to rectify lacunae in the existing law, retrospective amendments are inherently controversial.<\/p>\n<\/blockquote>\n

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Retrospective amendments introduced in 2012 enabled the Government to tax gains on certain transactions from 1-4-1961. The tax net was widened to include share transfers of foreign entities deriving substantial value from assets in India (also colloquially referred to as \u201cindirect transfer\u201d). Against this backdrop, there was widespread apprehension on the possible negative impact of capital inflows in an emerging economy like ours.<\/p>\n

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Fast forward to today, the Government has passed a separate amendment[1]<\/a> (2021 Act) in the Income Tax Act to nullify the retrospectivity in the law on offshore indirect transfers undertaken prior to 28-5-2012. Accordingly, orders raising demand on account of retrospective charge would stand nullified where the taxpayers agree to withdraw all pending litigation and waive their rights in all forums (including international arbitrations). As part of such trade-off, the Indian Government will refund all taxes collected on account of such retrospective application of law.<\/p>\n

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Background<\/span> <\/strong><\/h3>\n
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Offshore indirect transfers took center stage during the Vodafone<\/em>[2]<\/a> controversy wherein the \u00a0Supreme Court unequivocally held that Indian domestic tax law (at the time) did not permit taxing an offshore indirect transfer. However, the legislature expressed that the Supreme Court judgment was \u00a0\u00a0inconsistent with the legislative intent of the then existing provisions under Indian tax law (as acknowledged by the Statement of Objects and Reasons of the Bill of 2021 Act). Subsequently, the Parliament retrospectively amended the statute to \u201cclarify\u201d that an offshore indirect transfer in India has always been deemed to be a taxable event.<\/p>\n

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In some other parts of the world too, Revenue Authorities have sought to tax offshore indirect transfers (such as Bharti Airtel\u2019s acquisition of Zain Telecom in Africa and purchase of Petrotech by Ecopetrol in Peru). From a source country perspective, transferring source country\u2019s assets through indirect share transfers at an offshore level is nothing but an effective \u201ctransfer\u201d of assets in the source country. The source country naturally wants its share of the pie and claims tax on proportionate gains attributable to value derived from the assets located in the source country.<\/p>\n

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Ensuing disputes and arbitrations<\/strong><\/span><\/h3>\n
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The need to undertake concrete measures to address the negative effect on foreign investor sentiment was evident almost immediately. An Expert Committee chaired by Dr Parthasarathi Shome in 2012 made a case for the amendments to be made effective prospectively[3]<\/a>. However, despite successive changes of Governments, the amendments stayed in the statute.<\/p>\n

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According to Government\u2019s own data, tax demands were raised in 17 cases involving indirect transfers undertaken prior to 2012. Out of the above, two cases were stayed by the High Courts and bilateral investment treaties (BITs) with UK and the Netherlands were invoked in other four. In the past few months, Arbitral Tribunals ruled in favour of the taxpayers in the arbitrations of Vodafone International Holdings BV <\/em>v. Republic of India<\/em> (Vodafone)[4]<\/a> and Cairn Energy Plc and Cairn UK Holdings<\/em> Ltd.<\/em> v. Republic of India<\/em> (Cairn)[5]<\/a>. The tribunals based their view upon violation of the \u201cfair and equitable treatment\u201d standard guaranteed to the investors under bilateral investment treaties. Consequently, the Arbitral Tribunal awarded Cairn a billion dollar in damages for the \u201ctotal harm\u201d suffered by them as a result of breach of BIT with India. Such cases are a reminder of limits placed by international law upon sovereign right of taxation. International law recognises States sovereign right to tax and determine whether a specific transaction is chargeable to tax or not. However, the manner and imposition of tax on the foreign investor can be tested on the anvil of \u201cfair and equitable treatment\u201d under various BITs.<\/p>\n

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Until recently, news reports suggested that India did not accept the arbitration awards and appealed the decision in both Vodafone<\/em>[6]<\/a> and Cairn <\/em>case[7]<\/a>.\u00a0 At the same time, Cairn moved the United States District Court in the Southern District of New York (SDNY) on 14-5-2021 stating that they intended to enforce the arbitration award[8]<\/a>. Cairn sought seizure of assets of Air India as \u201can alter ego of Indian Government\u201d on the premise that Air India is State owned and \u201clegally indistinct\u201d from the State. For now, the US District Court has stayed the proceedings in light of any potential settlement that might be agreed between Cairn and India[9]<\/a>.<\/p>\n

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Course correction<\/strong><\/span><\/h3>\n
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The key aspects of the 2021 Act are as follows:<\/p>\n