02 March 2016 09:53:55 IST

Carrot for MNCs: pay up tax, end dispute

Will foreign investors grab interest and penalty waiver scheme and move on?

The Centre, in this Budget, has held out an olive branch to foreign investors fighting long-drawn legal battles with the Income Tax Department.

Since the amounts at stake are large, many investors might want to continue with the cases in international courts.

However, legal experts think some foreign investors might take up the offer in order to end the uncertainty.

The Finance Minister has introduced a Direct Tax Dispute Resolution Scheme, which offers a one-time opportunity to companies that have cases pending against them based on the retrospective amendment to the IT Act.

Possible gains Under this scheme, the companies can settle the cases by paying only the tax arrears to the Revenue Department. The interest and penalty will be waived.

But the companies are required to withdraw all pending cases in any court or tribunal based on the Bilateral Investment Promotion and Protection Agreements (BIPA).

It is, however, doubtful if the companies will take up the offer. Dr Suresh Surana, founder of RSM Astute Consulting Group, said: “It may be pointed out that in many cases, the interest and penalty is now more than the tax amount itself.”

For instance, in the Vodafone case, the original tax demand for failing to deduct withholding tax at the time of transfer of Hutchinson Essar’s stake was ₹7,900 crore. The penalty and interest take the total liability close to ₹20,000 crore.

Similarly, the tax demand on Cairn India was ₹10,248 crore while interest and penalty amount to ₹10,247 crore. The tax demand in the Shell case amounts to around ₹5,400 crore.

Since the tax demands on these companies run into large amounts, why would these companies bite?

Rakesh Nangia, Managing Partner, Nangia & Co, said many companies could take up this offer as it offers them closure.

Balancing act “The Centre has done a fine balancing act of ending such disputes. The retrospective tax still continues to be in force and the Centre has not amended the law to remove it. The case in international courts can swing either way and the companies (Vodafone, Cairn or Shell) cannot be sure of a victory in these courts. If these companies want certainty, they will accept it.”

Chanakya Shah, Partner, Talati & Talati, too thinks the scheme is a good idea.

“In my opinion it is a golden opportunity for global MNCs to settle all their pending dues and focus on their core activities of business. It will also help them save substantially on cost of litigation,” he said.

The Centre is also sending a clear message to foreign investors — that it is serious about not unnecessarily harassing. It has done this through the announcement that it will set up a high-level committee to look into any fresh case where the “assessing officer proposes to assess or reassess the income in respect of indirect transfers by applying the retrospective amendment.”

This will check arbitrary tax notices being sent to foreign investors by the Revenue Department.

Restore confidence “This can help restore confidence of international investors and would be a serious statement of commitment to reduce litigation. It will convey a message that we have a tax regime that ‘listens’. This will help us bury the ghost of retrospective amendments which have tarnished India’s image,” said RSM Astute Consulting Group’s Surana.