India to Avoid Tax Demands Totaling Rs 50,000 crore Resulting of the Government's Decision to Repeal a Retrospective Tax Statute

While the government has taken the first step toward eliminating all retrospective taxes, it had previously wanted more than Rs 50,000 crore from Vodafone and Cairn Energy. The government sought to repeal the relevant retrospective tax clauses enacted in 2012 by introducing the Taxation Laws (Amendment) Bill in the Lok Sabha on August 5.

Finance and Corporate Affairs Minister Nirmala Sitharaman said the demand raised for indirect transfer of Indian assets made before May 28, 2012, shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, and interest shall be filed.

This means that apart from withdrawing cases, companies like Vodafone, Cairn and others will have to give an undertaking that they will not seek legal damages, recoup legal costs or file cases related to retrospective taxes against the government in the future. The official clarified that upon fulfilling such conditions, the Centre will pay back the principal amount.

This would, however, mean the government would forego Rs 22,100 crore worth of taxes from Vodafone and over Rs 30,000 crore from Cairn.

Finance Secretary TV Somanathan noted that "approximately Rs 8,100 crore was collected so far" in the form of retrospective tax, "which includes over Rs 7,000 crore collected from Cairn UK".

 An international court of arbitration had in September last year refused India's claim of Rs 22,100 crore worth of back taxes and penalties. Instead, it ordered that the government must cease seeking dues from Vodafone and pay back Rs 45 crore of tax levy, as partial compensation for its legal costs.

The initial demand from the tax authorities back in January 2013 was Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest but no penalties. In February 2016, it updated the tax demand to Rs 22,100 crore plus interest.

The proceedings are currently ongoing in a senior court in Singapore with the next hearing set to take place in September. After the previous court order, India had sought to transfer the case elsewhere on jurisdictional grounds.

On the other hand, the government is seeking upwards of Rs 30,700 crore from British energy giant Cairn in penalties for its alleged failure to pay Rs 10,247 crore capital gains tax on time.

Last year, the Permanent Court of Arbitration at the Hague asked India to return $ 1.2 billion to Cairn, plus interest of $500 million.

Cairn had said losses incurred due to the government taking over its investments — including its equity shareholding, dividend receipts, tax refunds and preference share redemption — was more than $1.4 billion.

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