Government Releases Draft ‘Retro Tax’ Amendment Rules

The Income Tax Department has released draft rules for implementation of the amendments brought in for removal of the infamous ‘retro tax’. These draft rules have been put up for public comments till Sept. 4.

The draft rules have been issued under the Taxation Law (Amendment) Act, 2021. The act, passed in the Monsoon Session of Parliament, withdraws the 2012 amendment to income tax law — the amendment made taxable transactions by non-residents involving the transfer of shares of an overseas company that derived substantial value from assets in India, on retrospective basis as far back as 1961.

The 2021 amendment provides that the retrospective tax liability raised, in 17 cases so far, will be nullified provided the taxpayer furnished certain undertakings.

The draft rules now prescribe the format for these undertakings.

What Do The Draft Rules Say

• A taxpayer looking to settle such retrospective claims is required to file undertakings to ‘irrevocably withdraw, discontinue and not to pursue’ any appeal, litigation, arbitration or any other proceeding before any court or authority, including any enforcement proceedings.

• Any dispute with respect to the prescribed forms or orders under these rules would be governed by Indian laws, and Indian courts would have exclusive jurisdiction to decide such disputes.

• The taxpayer will indemnify the government against any claims made by 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 or concluded.

• The taxpayer would have 45 days from when the rules are notified to file the required forms and the tax authorities would respond within 15 days on acceptance or rejection of the forms, after an opportunity of being heard is provided.

The explanation to the amendment said the retro tax provision had led to income tax demands raised in 17 cases — two of which, Cairn PLC and Vodafone Plc., the government lost in international tribunals on account of bilateral investment treaty provisions.

When discussing the amendment in Parliament the finance minister said, the total refund due in these two cases and a third one, would amount to under Rs 8,000 crore.

The government has moved quite swiftly in issuing the format of these undertakings, Ajay Rotti, partner at tax consultancy Dhruva Advisors LLP, told BloombergQuint. The 17 cases can seek a quick resolution by filing the various declarations required under the rules, he said while reminding that "Importantly, only the tax amount will be refunded and not the interest component."

What happens if a taxpayer does not file the undertakings as required under the rules?

Rotti said in order to have the tax demand dropped as per the amendment, it is imperative for the taxpayer to file an undertaking.

Sandeep Jhunjhunwala, partner at tax consultancy Nangia Andersen LLP, said since no interest will be refunded in this process, few taxpayers who have litigation pending under the retrospective indirect transfer provisions, may still choose to continue with legal proceedings.

According to Rotti, for those who had conducted similar transactions but had not received orders raising demands from the tax department, they would not need to file any undertakings.

In his view, while the draft rules suggest a way to ‘implement’ the amendment, the amendment to the Income Tax Act in itself has taken away the ability of new orders being passed for transactions before 2012. Which means that even if a taxpayer does not furnish the declarations, it does not mean that the levy will be triggered in case of transactions done prior to 2012.