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India: Brings down the curtain on retrospective amendment to indirect transfer provisions

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The indirect transfer tax controversy in India takes centre stage

Umesh Gala, Saurabh Shah and Rushi Shah of Dhruva Advisors explain the impact of withdrawal of indirect transfer provisions.

The indirect transfer tax controversy in India has taken centre stage in the debate among international investors and the broader tax community. 

In regard to the indirect transfer tax case of Vodafone, the Supreme Court unequivocally decided the matter in favour of the taxpayer. It held that although the underlying Indian telecom business should be considered as the subject matter of the transfer in question, the Indian tax laws had no enabling provisions by which offshore share transfer deals could be taxed in India.

It was widely expected that the Indian government would respect the judgment of the Supreme Court. On the contrary, the Indian government retrospectively amended the law from 1961 by clarifying that offshore share transfer deals were always intended to be taxed in India in cases where such shares have derived their value substantially from underlying assets in India.

Thereafter, several taxpayers (Vodafone and Carin Energy being the most prominent) carried the matter to arbitration under the respective bilateral investment treaties and have recently been successful in getting their stand vindicated by the Arbitration Tribunal, which unfortunately was further challenged by the Indian government.

The proposal

Now, in a significant development, the Indian government has moved an Amendment Bill which seeks to make these ‘indirect transfer provisions’ prospective. The bill proposes that no fresh tax demands can be raised even in cases where proceedings are underway. Any orders passed raising demands for transactions prior to 2012 stand nullified provided that the litigation is withdrawn and there is no claim against the government for costs, damages, etc. The bill provides that the amounts collected from the taxpayers will be refunded, albeit without any interest. 

Impact and takeaways

The amendments seek to put the entire indirect transfer tax controversy to rest forever. They also require the parties to “either withdraw or submit an undertaking to withdraw the claim” under the existing litigation route they are pursuing. This would mean that the parties who are at loggerheads with the government will have to give up their claims for interests and costs. While at first glance this may not seem attractive, the fact that the principal tax component would be refunded in full can be a big game changer. 

Furthermore, the codifying of the ‘settlement’ in law leaves no scope for rule-bending in the future and therefore the settlement should be regarded as a fair proposition for both the parties currently in disagreement with the government and the government itself.

Although considering such a step to be a little late, the authors believe that it is certainly the right step in that it will successfully exorcise the ghost of retrospective amendments. More importantly, the measure comes at a time when there are a multitude of focused efforts to make India an attractive destination for foreign direct investment, which have gained especial relevance given the anti-China sentiment at present. 

This could potentially now mark an end to the saga and it certainly indicates strong statesmanship which will go a long way in enhancing India’s credibility and standing in the international investor community. This action will also play an important role in assuaging the concerns that investors have and will restore the credibility of the Indian tax and judicial system. 

While the withdrawal of indirect transfer provisions is expected to result in refunds of billions of dollars from the coffers of Indian exchequer, it clearly demonstrates India’s commitment to providing certainty in tax-related matters and invites foreign investors with open arms. 

It is too early to comment but one would be surprised if the big litigants do not choose to accept this offer to end the litigation.

While questions can be raised about whether the timing for this decision was correct, it is nonetheless better to have such a decision late rather than never. Could the government have taken this decision earlier? Maybe. But possibly the government was waiting for the result of the arbitration proceedings and given that the decision of the arbitration tribunals went against the government the ball was in the court of the government to come with a reconciliatory approach. 

In any case, such hypothesising is moot now. If implemented in the right spirit, this decision, together with multiple other decisions such as the faceless assessment scheme, has the potential to change the image of the Indian tax administration. The decision also sends out a strong signal to the international investor community that justice even if delayed is never denied in India. 

In the Finance Bill, 2021 presented on February 1 2021 there are a few proposals which were effective for the financial year beginning from April 1 2020 and in that sense could be termed as retrospective in nature. It appears fairly compelling that the government should avoid resorting to such amendments in future.

“Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower without causing any harm.” Of late, these wise words of the famous philosopher Chanakya have been a beacon in framing tax policies and in determining the governance of tax administration. 

Umesh Gala

Partner, Dhruva Advisors

E: umesh.gala@dhruvaadvisors.com



Saurabh Shah

Principal, Dhruva Advisors

E: saurabh.shah@dhruvaadvisors.com

Rushi Shah

Senior associate, Dhruva Advisors

E: rushi.shah@dhruvaadvisors.com

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