After Cairn Energy, Vodafone is expected to settle the retrospective tax dispute with the Indian government under the new legislation in the coming week, which will see the British telecom major withdraw international arbitration case against India. In turn, it will get a refund of Rs 44 crore collected as taxes previously.
India had appealed against the verdict of an international arbitration tribunal in Singapore in December to set aside the award on jurisdictional grounds. As per the award, the government has to reimburse Vodafone 60 per cent of its legal costs and half of the 6,000-euros cost borne by Vodafone for appointing an arbitrator on the panel, which stands at around Rs 85 crore.
"We are expecting Vodafone and others to come forward for settlement under the Taxation Amendment Act. While Cairn will get the biggest refund, others also want to settle these cases. They should apply in another week or so," said a government official.
Under the Act, Vodafone will have to indemnify the Indian government against future claims to settle their retrospective tax cases, according to rules notified by the government in October to settle disputes arising from seeking back taxes.
India lost arbitration to the British telecom major over a 2012 legislation that gave government powers to retrospectively tax deals like Vodafone's acquisition of 67 per cent stake owned by Hutchison Whampoa in 2007. It had challenged that tax demand of Rs 22,100 crore, including interest and penalty under the Netherlands-India Bilateral Investment Treaty (BIT).
The Ministry of Finance in October had notified new Relaxation of Validation Rules to settle the Vodafone retro tax case, which is different from that of Cairn and other cases. While the telecom major had faced validation of tax demand under Section 119 introduced in the Finance Act 2012, in the case of Cairn and others, the tax demands were issued after the 2012 amendment under Section 9 relating to indirect transfer of Indian assets.
Vedanta, which had bought Cairn Energy's erstwhile subsidiary Cairn India in 2011, is also likely to withdraw an arbitration it had filed in Singapore, seeking around Rs 5,000 crore in damages from the government.
"Vedanta will come separately for settlement. We are also expecting them to apply soon," said another government official.
India passed the Taxation Laws (Amendment) Act 2021 in Parliament in August, offering a settlement of the retrospective cases pertaining to the 2012 legislation on the offshore indirect transfer of Indian assets.
The government has collected Rs 8,000 odd crore from three of the 17 companies - Rs 7,900 crore from Cairn Energy, Rs 44.7 crore from Vodafone-Idea, and Rs 48 crore to WNS Capital - which it has proposed to refund under the new legislation if these companies fulfill certain conditions.
Last week, Cairn Energy announced the settlement of tax dispute with India, under which it will let go of the $1.2 bilion arbitration award plus penalty to avail a refund of Rs 7,900 crore collected as taxes. It entered into undertakings with the Indian government to participate in the scheme introduced by recent Indian legislation, the Taxation Laws (Amendment) Bill 2021 (the "Taxation Amendment Act").
The case pertains to the Rs 24,500-crore tax demand (including interest and penalty) on capital gains made by the oil major in reorganising its India business in 2006-07. The Income-tax department had launched retrospective tax investigation transactions undertaken prior to that in 2014.
Cairn will commence the filing of the necessary documentation under rule 11UF(3) of the Indian Income Tax Rules 1962 (Rules), intimating the withdrawal, termination and/or discontinuance of various enforcement actions, it added.
Cairn would be required to withdraw its international arbitration award claim, interest and costs and to end all legal enforcement actions in order to be eligible for the refund under the terms of a new legislation. The company had registered the arbitration award in many jurisdictions, including the US, UK, Canada, Singapore, Mauritius, France and the Netherlands. It had even sought mortgage of government properties in Paris and sought claim on Air India as "the alter ego of the Indian state”.
There are four forms under the Act. The interested company will have to submit the undertaking in Form 1 within 45 days from the date of commencement of the rules (October 1). Thereafter, the tax authority will have 15 days to pass an order and issue a certificate in Form 2.
Post that, the entity concerned will have two months to withdraw the litigation and inform the Department via Form 3. Based on that, the jurisdictional Principal Commissioner or Commissioner will issue directions in form 4, stating that the tax demand orders shall be deemed to have never been passed. This order will be binding on the Assessing Officer (AO), who will revoke the attachment (if any) and issue a refund within 15 days.
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