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Photo: Mint
Photo: Mint

Why India finds itself on a sticky tax claims wicket

Two high-profile disputes India has with the UK’s Vodafone Group Plc and Cairn Energy Plc have turned out to be difficult to resolve and are testing the government’s tax and investor protection policies in the international fora. Mint takes a look at what is at stake.

Two high-profile disputes India has with the UK’s Vodafone Group Plc and Cairn Energy Plc have turned out to be difficult to resolve and are testing the government’s tax and investor protection policies in the international fora. Mint takes a look at what is at stake

What lies at the centre of these tax disputes?

At the heart of the dispute is India’s efforts to levy tax on capital gains made by non-resident investors when they sell companies set up elsewhere but hold Indian assets. Vodafone’s entry into India via a complex transaction shows this. In 2007, the Dutch arm of Vodafone Group bought a Cayman island-based firm, which indirectly held a majority stake in India’s Hutchison Essar Ltd—later named Vodafone India—for $11 billion. Centre’s demand for 7,900 crore in taxes was upheld by the Bombay high court but was turned down in the Supreme Court in 2012. India then amended the Income Tax Act to clarify such deals were taxable.

What is the impact of tax law amendment?

The retroactive amendment to the tax law drew sharp criticism. After the Bharatiya Janata Party came to power, FM Arun Jaitley promised in his Union budget for FY15 that NDA government will not bring any change retrospectively which creates a fresh liability. Jaitley also said that retrospective tax has only brought a bad name to India and nothing in the way of taxes. But the pending tax demands under it would continue as per law to their logical conclusion. Vodafone, Cairn sought damages under India’s bilateral investment treaties. In 2015, India terminated all the 73 bilateral investment treaties it had and proposed a new model.

Troubled water
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Troubled water

Has the govt tried to resolve retrospective tax disputes?

Yes. India offered a scheme of conciliation to resolve disputes arising from the retrospective tax, but it did not succeed. However, reducing tax litigation remained high on the government’s priority. Several schemes were brought in to offer certainty in taxation and to negotiate between Indian and overseas tax authorities to settle disputes.

What’s at stake in the Voda, Cairn matters?

For the government, businesses using past bilateral investment protection agreements to seek damages for tax demands infringes on its sovereign right of taxation, can’t be allowed to go uncontested. For the companies, the tax dues, with interest and penalty added, could amount to hefty sums impacting their balance sheets. India has arrangements with the tax authorities in other countries for mutual cooperation in tax administration, which could mean India can seek their help in recovering tax dues.

Why is govt pursuing controversial claims?

In the government’s eyes, indirect transfers involving Indian assets have always been taxable and this was stressed in 2012 ‘clarificatory amendment.’ Aggressive planning by businesses using transactions that are legal in form but meant to avoid tax has been a challenge. Besides, businesses get benefit of tax credits, deduction of expenses and incentives, given their role as job creators, which is mostly not available to individuals. Since the tax base is finite, letting go of a tax demand would mean relying on other taxpayers excessively

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