After Cairn, more MNCs face retro tax notice

Even after the government clarified that multinational companies in India do not have to pay retrospective tax, sword is still hanging on more than 500 MNCs whose underlying assets are in India.

The income-tax department is doing reassessment of all retrospective tax cases that are to be closed by March 31.

While Cairn Energy of the UK has already got a tax notice of Rs 10,247 crore ($1.6 billion), other foreign companies are likely to get a call soon from the taxmen.

"There are 500 plus foreign companies whose underlying assets are/were in India. The tax liability can be made under the retro amendment brought in under Section 9 of I-T Act, by the finance bill, 2012," said Priyank Ghia, tax manager, Choksi & Choksi Group.

A senior I-T official told dna that under Section 147 of Income Act, 1961, an Assesse Officer (AO) can do re-assessment, where the AO has a reason to believe that any income chargeable to tax has escaped assessment for any assessment year. "The AO may access or re-access such income or any other income chargeable to tax," said the official.

"Notice for re-assessment, where income has escaped amount of Rs one lakh or more, should be issued within six years from the end of the assessment year," an official said.

What is the Cairn Energy issue?
Scottish oil explorer Cairn Energy Plc is the latest multinational to get a call over pending tax dues by the Indian I-T authorities, despite the new government's stance not to pursue such cases to develop a pro-business image.

How much is the claim?
The tax claim made by the Indian tax authorities are related to an alleged Rs 24,500 crore worth capital gains the oil explorer made in 2006 when it transferred its entire India assets from subsidiaries incorporated in Jersey to the newly incorporated Cairn India in 2006. After transferring the assets, Cairn India knocked on stock exchange through an initial public offering (IPO) in 2006 that raised Rs 8,616 crore. Indian tax authorities claimed that Cairn Energy received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.

Is the claim baseless?
"The above facts absolutely necessitate payment of tax by Cairn Energy Plc. There cannot be two yardsticks for assessment of tax liability," said senior advocate Rakesh K Singh on tax notice dispute.
"Though the company claims to have distributed much of the profit to shareholders, while retaining some for new exploration, still the tax demand is purely legal and within time, thanks to 2012 I-T law, which permits to raise claims on past deals," said Singh.

What led to several tax disputes in the past?
India has been embroiled in tax disputes in recent years with Vodafone, Cairn Energy, IBM, Microsoft, Shell, among others. However, Vodafone and Shell got relief from the high court, and the department has not further challenged the decision in the Supreme Court. To maintain the commitment done by Modi government to make the taxation law corporate friendly.

What is I-T department's next step?
The department has also told foreign portfolio investors (FPIs) to pay minimum alternate tax by March 31, just after the finance minister promised an end to "tax terrorism" and an adversarial tax regime. The I-T department has sent notices to around 90 FPIs and this could be extended to about 6,000 FPIs. At present, taxes on short-term capital gains from equity and equity-linked products is 15% and FPIs are not taxed on their long-term capital gains. FPIs investing in India through Mauritius claiming benefits under the tax treaty with the island nation do not pay any taxes on gains from the stock market. I-T department wants to levy 20% MAT on book profit. If MAT is levied, then FPIs would have to pay 20% tax even on their long-term capital gains.