Finmin Seeks to End High Profile Tax Disputes with Foreign Cos

Govt feels tax battles with cos like Cairn India & Royal Dutch Shell have tarnished India's image

The finance ministry, seeking to build on the recent success in pitching India as an attractive destination, is looking at burying for good the remaining high-profile acrimonious tax tangles involving Cairn India and Royal Dutch Shell, which have tarnished the country's administration. North Block is likely to replicate the Justice AP Shah panel mechanism, which helped address the issue of levying minimum alternate tax on foreign investors, to resolve the tax dispute with Cairn India and some remaining aspects of the Shell transfer pricing case. “We are looking at such a solution,“ a top finance ministry official told ET.

The move is in line with finance minister Arun Jaitley's September 17 assurance that pending tax disputes would be put to rest by either judicial or executive resolution. The government could send these cases to the Shah panel itself, as provided for in its original terms of reference.

However, the Vodafone-Hutchison case will have to go through the due legal process. “Such a mechanism could not be applied where assessment orders have been issued,“ the official said.

There is growing realisation in the government that high-decibel tax disputes have only hurt India's prospects as an investment destination and may not contribute to the tax kitty as well.

In the Cairn case, the income tax department had reasoned that Cairn UK Holdings made a capital gain when it transferred all its India assets in 2006 to a new company, Cairn India, which was subse quently listed on the stock exchanges. The department slapped a tax demand of Rs.20,495 crore on Cairn India for failing to deduct withholding tax on the alleged capital gains, prompting the company to serve a notice of arbitration on the government.

The tax demand notice to Cairn India was identical to the one issued to Vodafone for not withholding tax on the payment of $11.2 billion made to Hong Kong-based Hutchison Whampoa for buying out its interests in Hutchison Essar in India in 2007.

Vodafone challenged the notice and subsequently won the case in 2012, with the Supreme Court rul ing that the cross-border deal was not taxable in India.

The verdict led the government of the day to amend the law to tax indirect transfers with retrospective effect from 1961.

The Narendra Modi led-NDA government has promised a fair, predictable and non-adversarial tax regime. Modi reiterated this promise when he met foreign investors in the US.

In the Shell case, the Bombay High Court had struck down a Rs.18,000 crore transfer pricing order imposed on the Anglo-Dutch multinational and the government decided not to appeal the decision. However, some issues remain with respect to the company, the official said.

The government could include this in the reference to the committee. The government had asked the Justice Shah panel to examine the levy of minimum alternate tax on foreign portfolio investors after tax authorities issued notices to them following a ruling by the Authority of Advance Rulings. It accepted the panel's recommendation that MAT could not be levied on FPIs and foreign companies that do have a permanent establishment and will amend the law to this effect. A circular has also been issued to put into effect the Shah panel's recommendations.

Outsourcing is Not the Answer

It is a bad idea for the government to replicate the AP Shah panel mechanism to resolve ongoing tax disputes. It should desist such quick fix es. The controversy over the minimum alternate tax on foreign portfolio investors was a one-off case and had to be settled quickly as markets turned jittery. Intervention by panels cannot become the norm. Instead of outsourcing the job of tweaking tax policies to expert panels, the government must make tax laws clear and simple. The need is to reform the tax regime to end arbitrariness and minimise disputes.

The Economic Times, New Delhi, 1st Oct. 2015

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