Grant Thornton TaxPod – August 2021

Hello and welcome to the August 2021 edition of the TaxPod from Grant Thornton Bharat. We bring

you the latest tax developments that took place in the last month.

Let’s begin with key direct tax developments.

In a pragmatic but perhaps a little delayed move, the Government has enacted the Taxation Laws (Amendment) Act 2021 (Amendment Act) on 13 August 2021 which withdraws the retrospective applicability of the controversial indirect transfer provisions under the Income-tax Act.

Listeners may recall that the Finance Act 2012 had introduced certain clarificatory amendments to nullify the Supreme Court ruling in the case of Vodafone. It was provided that gains arising from sale of shares of a foreign company would be taxable in India if such shares, directly or indirectly, derive their value substantially from the assets located in India. These provisions were made restrospectively applicable from 1 April 1962.

Due to the amendment, tax demands were raised in 17 cases. Interestingly, out of the 17 cases, in 6 cases arbitration proceedings either under the Bilateral Investment Protection Treaty or under the International Court of Arbitration have been moved by aggrieved taxpayers.

That’s right! Stakeholders have repeatedly in the past pointed out that retrospective amendments mitigate tax uncertainty and adversely impact India’s position as an investor friendly destination.

Post the Amendment Act, these provisions will not apply to indirect transfers made before 28 May 2012 (that is the date on which the Finance Bill 2012 received President’s assent). It has also been provided that no tax demand shall be raised in future on indirect transfers that took place before 28 May 2012. Further, amount paid by taxpayers (if any) in these cases shall be refunded, but without interest.

In case where tax demand that has already been raised, the same shall be nullified on fulfilment of specified conditions by the taxpayer like withdrawal of pending litigation whether before Indian courts or pending in arbitration, conciliation or mediation etc.

Media reports indicate that the government is likely to refund about INR 8000 crore to four companies due to the Amendment Act.

This is a welcome move and highlights government’s resolve of improving of ease of doing business in India. It will go a long way in boosting investor’s confidence. It will help boost inflow of foreign investment during this covid recovery phase.

Let’s now move to the developments on the indirect tax front.

In a recent case pertaining to the powers of search and seizure, the Delhi High Court has held that the search and seizure power is an “intrusive power” that needs to be wielded with utmost care and caution. The court further observed that the expression “reasons to believe” controls the exercise of powers under the said provisions under the GST law. Therefore, unless the basic jurisdictional facts exist in a case, the power of search and seizure conferred cannot be exercised. Accordingly, the search and seizure conducted by the concerned officer was held as unlawful and flawed.

In yet another relief providing ruling to the manufacturing sector, the Madras High Court has set aside the order seeking reversal of input tax credit availed on GST paid on inputs which are lost due to consumption during the process of manufacture. The court observed that the loss of inputs occurred due to consumption in the process of manufacture is inherent to such process and is not due to any external factors. Infact, even the Apex Court under the erstwhile regime had held that an exact mathematical equation between the quantity of raw material used and the raw material found in the finished product is not possible and therefore, the tax credit in respect of lost inputs cannot be denied.

This is a welcome ruling by the Madras High Court and should provide required relief to the manufacturing sector and will set precedence in similar matters.

For last month’s GST related developments, download GST Compendium from our website, www.grantthornton.in.

That’s all for this time. We’ll see you next month.

Bye.