Finance Ministry drafts Rules to implement law burying retro tax

Our Bureau New Delhi | Updated on August 28, 2021

Sets mechanism for withdrawal of cases, indemnity from future litigation, ring-fencing Indian assets abroad

The Finance Ministry has come out with draft rules to implement the new law burying retrospective taxation. The draft rules propose a mechanism for withdrawal of cases, indemnity from any future litigation, ring-fencing Indian assets abroad, and the timeline for phased settlement of the matter.

The draft stipulates that the companies concerned will irrevocably withdraw, discontinue and not pursue any law suits, arbitration, conciliation or mediation either in India or abroad. They will have to withdraw proceedings to enforce or pursuing attachment in respect of any award against the Republic and/or all Indian affiliates. The draft defines Indian affiliate as any department, agency, instrumentality, public sector company or any other entity of the Republic of India owned directly or indirectly in India or any other country or territory outside.

No future claims

It wants companies to commit to not making any future claims. This is to safeguard against a separate interested party such as direct or indirect shareholders, or any other beneficial owner filing any claim against the Republic or Indian affiliates post filing the undertaking to withdraw current proceedings.

According to the Central Board of Direct Taxes (CBDT), the Income-Tax Rules, 1962 are being amended by inserting Rule 11 UE along with Forms 1 to 4, which specify the conditions to be fulfilled and the process to be followed to give effect to the amendment made by the 2021 Finance Act.

The timeline

Stakeholders have been given time till September 4 to give their views, and then the Rules will formally be notified. Once the draft is notified, then the companies concerned will be given a certain time to file Form 1, undertaking to use the provision of law. The tax authority will have 15 days to pass an order and issue a certificate in Form 2. From the date of receipt of this form, the enity concerned will have two months to withdraw the litigation(s) and inform the Department via Form 3.

Based on that, the jurisdictional Principal Commissioner or Commissioner will issue directions stating that tax demand orders shall be deemed to have never been passed. This order will be binding on the Assessing Officer (AO), who will revoke the attachment (if any) and issue refund within 30 days.

By Indian law & courts

According to Sandeep Jhunjhunwala, Partner with Nangia Andersen LLP, “interestingly, any dispute with respect to any of the prescribed Forms or orders under these rules would be governed by Indian laws and Indian courts would have the exclusive jurisdiction to decide the disputes.”

The new Finance Act amended the Income-Tax Act, 1961 and the Finance Act, 2012 to ensure that any demand raised for offshore indirect transfer of Indian assets made before May 28, 2012 will be nullified subject to some conditions like withdrawal of litigations. Once these conditions are fulfilled, the government will refund the tax amount paid by the companies. Seventeen tax demands were validated by the retrospective amendment, out of which the government got tax only in four cases.

Published on August 28, 2021

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