Taxation Consistency Restored: Positive step by the GOI
- Posted on September 1, 2021
With the doing away of the Retrospective taxation provisions by way of amendment to the Income Tax Act, the Government has brought in a sense of relief to the business community.
Background in brief:
In February 2007 , the Dutch Company Vodafone International Holding (HIV) acquired 100% stakes in the Cayman Island based CGP Investments (Holdings) LTD (CGPIHL) . CGPIHL in turn controlled 67% stake in Hutchison Essar Ltd (HEL) an Indian entity. Post this acquisition, Vodafone not only gained control of CGPIHL but all its subsidiaries and HEL. HEL was in possession of telecommunication licenses for mobile communications in various circles in India.
In 2007, IT authorities served a notice to Vodafone Company questioning why withholding of capital gains tax was not done by Vodafone while completing the acquisition transaction stated above. They considered this as an ‘indirect transfer of assets in India’.
Vodafone filed an appeal before the Mumbai High Court challenging the jurisdiction of the IT Dept. in this specific transaction. The Mumbai High Court ruled that the IT department was responsible and therefore had the jurisdiction on this case. Vodafone filed a Special Leave Petition in the Supreme Court and it was ruled in favour of Vodafone in 2010.
Few of the significant observations of the Supreme Court were as follows:-
1) Sec 9(1)(i) of ITA did not cover the term ‘indirect transfer of asset’ and therefore the shares which have been transferred to CGP cannot be considered as transfer of assets in India and therefore Indian tax authorities cannot apply taxes to them.
2) Sale of shares of HTIL’s CGP holding does not come under sec 2(14) of the Income Tax Act
3) Sec 195 is applicable only in cases where (i) there is a reimbursement or payment made to a Non Resident and (ii) such payment must be chargeable under the IT Act. TDS requirement arises only if these two conditions are satisfied.
4) Business entities and individuals are entitled to arrange their affairs to reduce tax liability in a legitimate manner.
5) Only if there is evidence and circumstances to show that a corporate structure or a transaction is a sham and designed to evade taxes, the corporate veil should be lifted.
Retrospective Legislation in Taxation
India is not the only country that has been having ‘retrospective legislation’. The Nuremberg Trials (in Germany), Crimes (Taxation Offenses) Act 1980 (in Australia) are few examples of retrospective laws in other jurisdictions.
The Supreme Court in Chhotabhi Jethabhai Patel & Co. v. Union Of India (1962) held that “Parliament Acting within its legislative powers could by law both prospectively and retrospectively levy Excise Duty and Salt Act , 1944. This was inspite of the fact that by virtue of the retrospective effect given an assessee was incapable of passing on excise duty to the buyer.”
When it relates to Fiscal administration, the legislature possesses wide discretionary powers. These enactments do not impose a fresh tax with retrospective effect. These provisions generally seek to remove a defect or lacuna that would have been the reason for it being declared illegal or unconstitutional by the courts.
Tax certainty restored
With the passing of The Taxation Laws (Amendment) Bill, 2021, the ITA effectively withdraws the tax demands raised on firms (including Vodafone and Cairns Energy) for capital Gains from deals made prior to May 28, 2012. About Rs. 8,100 crores that was collected through the retrospective tax legislation would be refunded without any interest by the government. Further, retrospective legislation may be a thing of the past.
The draft rules (Rule 11 UE) proposes to negate the retrospective taxation and require the concerned companies to irrevocably withdraw , discontinue and not pursue any law suits, arbitration, conciliation or mediation in India or abroad. This includes withdrawal of proceedings to attach or enforce in respect of any award against the Republic and/ or all Indian affiliates. Further all the future claims by the Company would stand extinguished. Forms 1, 2 and 3 have been proposed whereby the entity concerned would need to inform the Department of its withdrawal of litigations.
Thereafter, Principal Commissioner or Commissioner would issue directions nullifying tax orders that were issued. Attachments (if any) by the AO would be revoked and issue refunds in 30 days.
Bilateral Tax Treaties such as the Double Taxation Avoidance Agreements, WTO Agreements replace the exclusive sovereign rights to taxation with pooled exercise of taxation powers. In times when revival of the economy is the priority in the light of the pandemic, restoring Tax Certainty brings in confidence to Investors who were hitherto uncertain due to the aforementioned cases.
With the doing away of the Retrospective taxation provisions by way of amendment to the Income Tax Act, the Government has brought in a sense of relief to the business community. Background in brief:In February 2007 , the Dutch Company Vodafone International Holding (HIV) acquired 100% stakes in the Cayman Island based CGP Investments (Holdings)…