The retrospective application of capital gains tax on indirect share transfers will haunt companies till it is resolved through changes in the law, say tax experts.
The Rs 10,247-crore (Rs 102.47 billion) tax demand on Cairn Energy over the alleged Rs 24,500 crore (Rs 245 billion) worth of capital gains it made in 2006 is among 37 similar cases that were examined by the tax department since 2012.
Though the Finance Bill 2015 sets the deemed value that will trigger capital gains tax on indirect transfer of shares, experts say it is not clear about retrospective application. The changes introduced in the Finance Bill 2015 are applicable from April 1.
According to Milind Kothari, managing partner and head of direct tax at BDO India, the tax demand on Cairn Energy is legitimate.
“If the transaction had taken place on April 1, 2015, the companies involved would have been liable to pay tax,” says Kothari.
But the retrospective application of the tax, introduced in the Finance Act in 2012, has not been dealt with legally.
Experts point out retrospective claims may not stand the test in international courts.
“Under bilateral investment treaties any retrospective clause is perceived as a breach,” says Kothari.
The government must make the law prospective from 2012, notes Vijay Iyer, national leader for transfer pricing, EY India.
“Since the government has not taken any steps to undo this amendment, the tax authorities seem to be persisting with cases where indirect transfers may have happened,” he adds.
“This is not in keeping with the approach of tax authorities we have seen in recent months,” says Sunil Jain, partner, JSA Associates & Solicitors.
The tax authorities have not made any fresh tax claim on similar grounds from foreign and Indian companies since last July.
“There is no logical case to impose tax on internal restructuring where there is no alienation of assets to a third party,” says Iyer.
He feels the government must offer protection to genuine internal reorganisations.
Apart from seeking international arbitration, Cairn Energy can also challenge the retrospective tax provisions in Indian courts.
This is likely to be a lengthy route for resolution, lawyers say.
“We don’t want the uncertainty in the investment climate to return,” says Sriram Govind, member of the international tax practice at Nishith Desai Associates.