India proposes prospective application of law taxing the indirect transfer of shares
India amended its Income-tax Act in 2012 pursuant to the Supreme Court judgement in the case Vodafone International BV and levied capital gains tax on indirect transfer of share or interest in Indian Company, with retrospective effect from April 1, 1962. The retroactive application of the amendment invited considerable criticism from stakeholders. Income tax liability was raised on Vodafone like transactions undertaken prior to the amendment in 2012. In a few cases, taxpayers invoked arbitration provisions under Bilateral Investment Promotion Treaties. Earlier, in couple of cases such as Vodafone, Cairn Energy, Arbitration Tribunal has ruled in favor of taxpayers and against the Indian tax Department.
Today, Indian Government has presented a bill in Lok Sabha (the lower House of the Indian Parliament) proposing that the above amendment shall apply prospectively only to the transactions undertaken after May 28, 2012 (the date on which the Finance Bill, 2012 received presidential assent). The Bill also proposes that tax demands raised in respect of transactions undertaken prior to May 28, 2012 shall be nullified subject to fulfilment of certain conditions, such as withdrawal of pending litigation, furnishing of undertaking to the effect that no claim for damages, cost shall be filed.
Implications
Many times companies invest in Indian entities through holding companies in jurisdictions with favorable capital gains tax provisions such as Mauritius, Singapore or Netherlands. Any restructuring or divestment of investments in Indian subsidiaries/group companies prior to 2012 by transferring shares in such overseas holding companies had a risk of Indian tax exposure due to the above retrospective amendment. The proposal once enacted will provide certainty about non-taxability of such transactions undertaken prior to 2012.