Retro Tax: Govt. Seeks Legal View if Assurances by Cos are Binding

The Indian government is seized by concerns on whether assurances being sought from companies for settling the retrospective tax dispute under Indian laws leaves it vulnerable in international courts and arbitration panels. The government is keen in clearing this point with companies.

India recently brought a bill to repeal the retrospective tax amendment introduced in 2012.

The government promised to refund taxes already collected and withdraw all litigation and arbitration. In return, companies must give an undertaking that they will withdraw litigation in all forums, and will forgo any damages, interest or other costs.

And there lies the bind for the government. Many government advisers are now examining whether such an undertaking is binding and whether companies could litigate or challenge India in international forums after seeking tax refunds under local laws.

“Whether the agreement asking companies to let go of damages and interest is binding as per international law is a question that needs clarity. Many companies, especially the ones that have seen some success in international arbitration, may have to take a strategic call on whether to opt for India’s offer and would need to be sensitive to their shareholders from a governance perspective,” said Girish Vanvari, founder of tax advisory firm Transaction Square.

The government has reached out to some legal experts on the issue, said people aware of the development. The government has still not come up with precise rules and procedures for seeking refunds, or how, in which form should the undertaking be sought from companies.

The government would hope to plug loopholes and to make these assurances binding and ring-fence it from further litigation in foreign courts or arbitration panels.

Legal experts point out that the way the rules are articulated would be very crucial in resolving the dispute.

“The government should provide more clarity around retrospective tax and how taxpayers should go about it, and that should be done quickly. The biggest issue is that of hurriedly drafted tax legislations. It is not just the taxpayers but even. tax administrators face issues due to that,” said Nishith Desai of Nishith Desai Associates, a law firm. People in the know said that the question of the prevalence of domestic law against the international regulations may arise even after some companies settle the dispute. This was one of the main issues based on which Cairn Energy managed to win the arbitration award of $1.2 billion against India.

“In the past there have been instances where the government has changed its stance even after coming out with rules and regulations, and one hopes that doesn’t happen. But at the end of the day, if companies decide to opt for a resolution under the scheme, it will also be a leap of faith,” said Desai. S-ET

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