Direct Tax

The Indian income tax framework saw some interesting developments such as the introduction of a new faceless appeal scheme, notification of rules for withdrawal of retrospective applicability of indirect transfer tax provisions and announcement of an agreement between India and US on certain contested tax issues.

Himanshu SinhaPartner

Aditi GoyalCounsel

Yash AgarwalAssociate

The Government’s tax initiatives in the previous quarter were aimed at delivering clarity and transparency. Towards this end, the Government launched a new faceless appeal scheme to ease the compliance burden for taxpayers and address the issues being faced with respect to the previous iteration of the scheme. Closing the loop from the quarter ending September 2021, the Government also issued rules pertaining to the withdrawal of retrospective indirect transfer tax provisions. The notified rules require taxpayers to irrevocably withdraw all proceedings in relation to indirect transfer tax demands and waive all rights against India in this respect. Further, India and the US agreed on a transitional approach aimed at phasing out the 2% equalisation levy imposed by India on non-resident e-commerce operators.

Key Developments

  • Agreement between India and the US on a transitional approach for 2% equalisation levy

    The Ministry of Finance issued a press release on 24 November 2021 (Press Release) announcing that India has reached a political agreement with the US on a transitional approach aimed at phasing out the unilateral 2% equalisation levy (EL) imposed by India on non-resident e-commerce operators. This is a welcome move as it came in the backdrop of trade tensions between India and US, after the US Trade Representative’s office concluded that the EL imposed by India is unreasonable, discriminatory and restrictive of US commerce.

    The transitional approach agreed by the two countries is in line with similar agreements between the US and five other countries (i.e., Austria, France, Italy, Spain and UK) and is a step towards the implementation of the 'Two-Pillar Solution' to address tax challenges arising from digitalisation of the economy. To provide a brief background, as of 4 November 2021, 137 members of the Organisation for Economic Co-operation and Development (including the India and US) have agreed to a Two-Pillar Solution to address the tax challenges arising from digitalisation of the world economy. Pillar One provides for a mechanism for allocating profits earned by various tech-based multinational enterprises (MNEs) to the different jurisdictions in which they operate for the purposes of taxation. As part of Pillar One, all signing countries are required to remove all digital services taxes and other similar unilateral measures (such as India’s EL in the present context).

    The transitional approach agreed to by India and the US would apply from 1 April 2022 to 31 March 2024 or the implementation of Pillar One, whichever is earlier (Interim Period). The 2% EL would not be withdrawn in India until Pillar One comes into effect. However, India would provide credit to US MNEs for excess 2% EL paid during the Interim Period. Broadly, the credit would be computed as the difference between the 2% EL paid in the Interim Period and the liability under Pillar One calculated for the Interim Period (as if Pillar One was already implemented). Credit would be allowed in the first taxable year after the end of the Interim Period in which the MNE is subjected to tax under Pillar One. Any unutilised credit amount may be carried forward until it is entirely exhausted.

    Apart from the above, the Press Release also states that until the end of the Interim Period, the US would not impose any trade actions with respect to the 2% EL.

    The terms of the agreement are likely to be finalised by 1 February 2022.

  • Rules for the withdrawal of retrospective indirect transfer tax have been notified

    The indirect transfer provisions were inserted in the (Indian) Income Tax Act, 1961 (ITA) in 2012. Under these provisions, gains arising from transfer of shares in an offshore entity, deriving substantial value from assets located in India (commonly referred to as 'indirect transfer'), were taxable as capital gains in India. These provisions applied retrospectively from 1 April 1962. This resulted in tax demands being raised for transactions undertaken prior to 28 May 2012 as well, i.e., the date on which the amendment received presidential assent.

    In August 2021, the income tax law was amended to do away with this retrospective applicability and consequently tax demands cannot be raised under the indirect transfer provisions for transactions undertaken prior to 28 May 2012. Further, the amendments provided that tax demands already raised for such transactions would be nullified subject to fulfillment of specified conditions.

    Rules for nullification of the demands already raised were notified in October 2021. Broadly, it has been provided that any tax demand raised earlier would be nullified if the person against whom such demand had been raised (along with other interested parties) irrevocably withdraws all proceedings in relation to the relevant orders (including proceedings in relation to arbitration and attachment of property) and waives all rights against India arising from the relevant orders. Further, such person is required to provide an undertaking in the prescribed manner to the relevant authorities that the proceedings so withdrawn will not be reopened and also issue a public notice/press release in this regard. Additionally, the taxpayer would be required to indemnify India against any liabilities arising out of the assertion of any claim at any time after the filing of the undertaking.

  • Faceless Appeal Scheme, 2021 notified

    On 28 December 2021, the Government of India notified the Faceless Appeal Scheme, 2021 (Scheme) with a view to bring changes to the procedure for disposal of appeals by the first appellate authority under the ITA [i.e., the Commissioner (Appeals)]. The Scheme supersedes the erstwhile faceless appeal scheme which was launched in September 2020. Through the Scheme, the Government has notified procedures for (a) appellate, penalty and rectification proceedings; (b) filing of additional grounds; (c) admission of additional evidence, etc. Unlike the earlier scheme, this Scheme does not provide for the passage of a draft appeal order. More importantly, it provides taxpayers with the right to an oral hearing, making it mandatory for the Commissioner (Appeals) to grant a hearing if requested by a taxpayer.

The measures taken by the Government underscore consistent efforts to provide a simpler and unambiguous tax environment in the backdrop of the prolonged pandemic. It is expected that the Government will continue to take measures to ensure a stable regulatory and policy framework for tax administration and compliance. Key focus areas in this regard include rationalization of tax withholding provisions, and clarity with respect to taxation of the digital economy. It would be interesting to see if the forthcoming budget proposes any amendments aimed at simplifying these areas.

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