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Retro tax draft rules: A magnanimous offer from govt, but they appear to be cumbersome, says Advocate Sanchit Jolly

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These draft rules lay out a structure as to how this will be formalied, what would be the modalities for affecting this change, which is to do away with retro tax that had been slapped on the likes of Vodafone and Cairn.

India today released the draft rules for withdrawing retrospective tax amendments. This comes weeks after it passed the legislation to nullify the retrospective taxes, an issue that has vexed foreign investors for close to a decade now, resulting in as many as 17 legal cases, including arbitration losses for India.
These draft rules lay out a structure as to how this will be formalied, what would be the modalities for affecting this change, which is to do away with that retro tax that had been slapped on the likes of Vodafone and Cairn.
These draft rules laid down various modalities, which in fact, some experts have termed 'as little as cumbersome'. The modalities also give clarity on the way forward in terms of what is required from the companies in terms of undertakings they have to undertake that they have seized and they have withdrawn from all pending legal proceedings in courts - high courts, Supreme Court, tribunals, even arbitral proceedings.
Companies will have to undertake to forego any rights or vested rights they might claim with respect to the companies or claims that they might have with respect to India, any claims for damages, interests -- all of that will have to be forgotten, and that will have to be stated. And only after that, once the department is satisfied with the undertaking the benefit will flow to the company in the form of doing away with the demand in its entirety.
Meanwhile, CNBC-TV18 sources in the revenue department of the finance ministry say that the government is in informal talks with all 17 companies that are impacted by the recent retrospective taxation Amendment Bill. All these companies are keen on ending the legacy tax disputes, and they are currently studying the rules that have been notified by the government over the weekend. These rules are open for one month for public comments and company responses. Cairn and Vodafone have been in touch with the government informally over this particular tax relief. The government is also open to accommodate any concerns that the companies may have on the recent rules that have been put out for the retrospective taxation amendment.
CNBC-TV18 had reached out to Vodafone, Cairn Vedanta etc, seeking their responses but they are still awaited.
To help decode what these draft rules mean and what they mean for the companies in question. The channel spoke with Sanchit Jolly, Partner at DMD Advocates. When asked, how comfortable does he think companies will be for giving up their claims to interest on costs, on damages as long as this issue is put to rest?
He said, “I believe most of them should be barring one or two exceptions, without going into the exact details. I think it's a magnanimous offer from the government. Let us give credit, where it is due. Let us put the past behind, let's move forward. I think most of them will be comfortable and they should be comfortable. If they were to take my advice, I would say withdraw and settle. Barring the cumbersome procedure. This is a watershed moment in ending this dispute. It should be the end of it now.”
Further explaining the nuances of the draft rules, Jolly said they do appear to be cumbersome. Ideally, one would have probably wanted a very simple undertaking that the amendment will be prospective and you will give up all your claims. “I think the government must have faith in the taxpayers. “If they are coming and burying the hatchet, some amount of courtesy should be extended. These rules as they appear, and the undertakings show a little bit of distrust from the government side. But not getting into granular details, a couple of things which I believe should be there in the rules. One is the withdrawal by the government of their arbitration claims.”
However, from the rules today, which they are, it appears that the Commissioner of Income Tax, the jurisdictional Commissioner will direct the assessing officer to withdraw the tax demand. It doesn't say how the appeals, which are pending at different courts, whether it's Hague or Singapore, how will they be withdrawn. It cannot be that the assessing officer will go there and withdraw. It has to be Republic of India, which has to withdraw the appeals, said Jolly.
Secondly, and more importantly, another tied-up aspect with this is the settlement should be with the CBDT at the least, maybe the Ministry of Finance. Having an assessing officer and a commissioner level, in itself can throw up a little bit of doubts there, he specified.
One doesn't hope that after the dispute is settled, there'll be another round of litigation. But if it is left at the granular level, at the lowest level of the assessing officer, history and experience suggest that there could be another round of litigation there, said jolly, adding that, "We have seen that with the litigation around the Vivad Se Vishwas Act, which was brought in to settle tax disputes otherwise. As well as there was a settlement scheme of 2016, I have recently appeared in a matter where the government finally withdrew its tax appeal from the Supreme Court in August 2021."
“So if it's going to take five years for settlement to happen, it just going to be cumbersome. One would hope that just like the advanced pricing arrangements, the CBDT will sign the agreement, or the Ministry of Finance, and then the rest of the course can be charted out,” said Jolly.
When asked if there is an apprehension that perhaps the process itself of arriving at a settlement could also invite more litigation, more courtroom battles between the two sides, going forward. Is that an apprehension?
Jolly, said” The rules itself envisage that problem, there is a sub rule 6, which says if there is a dispute with respect to the forms, you will have to go to a court in India, you can't take it in arbitration. I think probably the government also realises that there could be a dispute under the form.”
“The idea is there has to be a settlement. If it has to be a settlement, it can be that you initiate another round of litigation to settle. I would hope, and that's why I believe it should be at the highest level. You cannot leave these details to an assessing officer. Although with great respect, I don't have anything against the tax officials but I think it will have to be at the highest level, the settlement won't happen at the lowest level,” Jolly reiterated.
Watch the video for more details.
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