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CBDT to waive interest if tax demand paid in retro cases
March, 29th 2017

Nearly two months since the one-time window for companies under the Dispute Resolution Scheme came to an end, the tax department has decided to waive off interest liability if the principal demand of capital gains tax is paid by companies. The Central Board of Direct Taxes (CBDT) on March 24 issued a circular for waiver of interest in disputed tax demand in various scenarios. Tax officials can now waive or reduce interest in cases where the taxpayer did not deduct tax based on a high court ruling that was subsequently overturned by the Supreme Court or via a retrospective amendment.

“However, no reduction or waiver of such interest shall be ordered unless the principal demand… stands fully paid or satisfactory arrangements for payment of the principal demand have been made,” CBDT guidelines to chief commissioner of income tax and director general of income tax said. The guidelines also state that interest can be waived in cases where tax deduction at source could not happen because of seizure of books of accounts and other documents by the income tax department. The same can also be done in cases where the default is related to “non-deduction or a lower deduction of tax in respect of a payment made to a non-resident (including a foreign company) being a resident of a country or specified territory outside India with whom India has entered into an agreement.”

Finance minister Arun Jaitley on February 28 last year had announced the Direct Tax Dispute Resolution Scheme. The scheme, which closed on 31 January, provided for waiver of interest and penalty if the principal amount involved in retrospective tax cases is paid and all appeals against the government challenging constitutional validity of back-dated amendment to income tax laws are withdrawn. The scheme was seen as a one-time window provided by the government for companies such as Cairn Energy and Vodafone, which have ongoing tax disputes with the tax department.

Vodafone faces Rs14,200 crore tax bill for failing to collect taxes when it paid $11 billion to acquire Hong Kong-based Hutchison Whampoa’s 67 per cent stake in India mobile-phone business in 2007. UK’s Cairn Energy has been slapped with over Rs 29,000 crore in tax demand including Rs10,247 crore in principal due, for alleged capital gain it made in 2006 when it transferred its India business into a new subsidiary, Cairn India, and got it listed.

Simultaneously, the tax department also raised a tax demand of Rs 20,495 crore on Cairn India for failing to deduct withholding tax on alleged capital gains made by its erstwhile parent Cairn Energy in 2006-07 when it reorganised India business. Neither Cairn nor Vodafone participated in the Dispute Resolution Scheme and have dragged India to arbitration contesting the demands. Earlier this month, tax tribunal ITAT upheld levy of Rs 10,247 crore capital gains tax on UK’s Cairn Energy but has held that interest cannot be charged on it as the demand was raised using retrospective tax legislation.

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