India Holds Out for Last Takers on Tax Dispute Settlement Scheme

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By Siri Bulusu

The Indian government has extended a scheme to settle tax disputes by one month to allow companies to resolve pending litigation ahead of the introduction of the country’s budget before parliament.

The success or failure of the Direct Tax Resolution Scheme—which will now expire Jan. 31, 2017, just before the Feb. 1 presentation of the budget—will determine the Indian government’s next steps in creating a more conducive business environment for foreign multinational corporations, a considerable issue for foreign companies like Cairn Energy and Vodafone Group currently stuck in decade-long arbitration.

“The biggest problem in India is the inordinate amount of time litigation takes,” Riaz Thingna, director at Grant Thornton Advisory Pvt. Ltd., told Bloomberg BNA Jan 5.

“The first level of appeal can be quick, maybe a few years, but in the case of multiple appeals reaching up the Supreme Court, it can take 15 to 20 years.”

The settlement offer applies to disputes arising out of India’s 2012 retroactive amendment to its tax laws, which was targeted at a $2.5 billion Vodafone dispute. India’s Supreme Court found for the company, but the government passed the law so it could go back and reopen the dispute and impose a new provision that allowed the government to tax overseas sales of Indian businesses whether or not the buyer or seller were Indian residents.

Under the terms of the proposed settlement announced last February by Finance Minister Arun Jaitley, no fresh tax demand would be raised under the contentious and unpopular amendment. Affected companies can settle ongoing disputes by paying only the tax arrears, with interest and penalty liability waived as long as the assessed company agrees to withdraw any pending court, tribunal, arbitration or mediation proceedings.

Vodafone, Cairn: Costly Disputes

The Indian government’s tax dispute with Vodafone group began in 2007 when Vodafone acquired India-based telecommunications company Hutchinson Essar Ltd. through a Cayman Islands-based subsidiary. The transaction was held by the Supreme Court of India to be outside Indian tax jurisdiction, but the retrospective 2012 amendment reversed the tax position and Vodafone was slapped with a multi-billion dollar tax liability.

The Income Tax Department cited the same 2012 tax law amendment to Cairn Energy in 2014 when it issued a tax assessment of 10,2 crore rupees ($1.5 billion), claiming that Cairn incurred 245,03.5 crore rupees ($3.6 billion) in capital gains from an internal corporate restructuring. The U.K.-based company is now seeking full compensation from the Indian government stating the tax demand was in violation of the UK-India Investment Treaty.

260,000 Disputes Pending

The government expected 70,000 cases to be resolved under the dispute settlement scheme, out of nearly 260,000 pending tax disputes, but since the scheme came into effect June 1, 2017, only 300 companies opted to settle.

Tax practitioners anticipate more companies will opt into the scheme now that the extension has renewed awareness around it, but say frivolous tax assessments will cause companies to “stick to their guns.”

While tax dispute appeals climb the ladder of Indian courts up to the high court over the course of many years, subsequent rulings in favor of the government by lower courts can weaken a company’s case by the time it reaches the Supreme Court.

Moreover, Thingna said that a company that holds out and wins its case in the highest court isn't immune to further retrospective amendments by the Indian government, bringing that dispute “back to square one.”

Direct Tax Dispute Resolution Scheme (2016)

The scheme allows companies to concede their tax dispute under the following conditions:

  • if the disputed tax amount is above a million rupees ($14,713.46), you pay 25 percent of the penalty plus the disputed tax amount;
  • if the disputed tax amount is below a million rupees ($14,713.46), the penalty is waived and companies will be required to pay only the principal tax amount;
  • in cases where only a tax penalty is being disputed, a company opting into the scheme will pay 25 percent of the disputed penalty.
  • “The issue is that the Indian government is asking for too much money,” Sanjay Kumar, head of tax for Deloitte India, told Bloomberg BNA Jan 4.

Frivolous Government Demands

Foreign companies have said the government has raised very frivolous demands, Kumar said, “so how can they give into that.”

He described the scheme as “punishing” and added that many of the disputes are based on subjective audits so companies are reluctant to concede to the Indian government as it could create an unfavorable precedent for future cases.

“People want a more evidence-based audit rather than opinion based audits,” Kumar said. “The facts have to be specified so the litigation can take a more narrow focus, because now it is taking a very wide view against companies.”

Once the scheme expires at the end of the month, the thousands of pending cases will return to normal appellate proceedings, which Kumar called “cumbersome.”

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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