There are seven such amendments including change in definition of royalty— introduced in 2012 along with indirect transfer of asset— that companies say are retrospective in nature but have not been addressed.
“There are several retrospective regulations, albeit introduced from the beginning of the year, causing several problems for companies,” said Dinesh Kanabar, CEO, Dhruva Advisors, a tax advisory firm. “Many companies are already litigating these and that is only impacting the time value of money and India’s score on the ease-of- doing-business quotient.”
Companies that had paid advance taxes in 2020 have now been asked to cough up additional taxes and interest after a retrospective law was introduced in the 2021 budget.
This year, the government changed the provisions of slump sale and goodwill valuation – moves that led to changes in transactions undertaken last year and requiring the payment of additional taxes.
“The denial of depreciation on goodwill and introduction of taxes on slump sale transactions that were introduced this year will impact all transactions carried out since April 2020. These amendments impact companies that have already paid advance taxes but will now have to go back and pay additional taxes and even interest on that due to the retrospective amendment,” said Kanabar.
Companies that undertook mergers, acquisitions, slump sale or corporate restructuring that resulted in creating goodwill will also see an impact on their net profits and earnings per share.
Under accounting rules, goodwill depreciates after a merger or acquisition.
Goodwill is typically written off within a few years after a transaction, leading to lower tax outgo.
This is now disallowed following the 2021 budget, although the government said it will be applicable even for earlier years.
What this means is that any company that has created goodwill through a transaction even in 2015 or 2016 will be disallowed to claim depreciation from 2021 onward.
This retrospective change was made following a Supreme Court decision that allowed such depreciation.
Similarly, this year the government also tweaked the regulations around slump sale.
The new slump sale rules have come up with precise methodology that a company is required to use while calculating the valuation of the slump sale transaction.
In most cases, this would mean that companies would see the value go up along with the tax on such a transaction.
The new rules define how a “fair market value” of an asset or company is to be arrived at.
In a slump sale, companies, entities or assets are sold lock, stock and barrel. In many situations, listed entities have even bought such entities. In some cases, internal restructuring and inter-group transactions, too, are being done through this method.
The tax department has started scrutinising valuation of the slump sale based on current rules, and how this should have resulted in higher taxation.
The other retrospective changes the government brought in include the change in royalty.
Interestingly, this was done the same year as the infamous retrospective tax that impacted Vodafone and Cairn Energy.
The government amended the definition of royalty in the domestic tax law. The question many tax experts asked was whether domestic laws superseded the international tax laws. This is because most of the royalty payments are defined and agreed upon between countries under tax treaties.
Many companies hope that India will also address some of these retrospective tax changes along with the indirect transfer of assets.
The government has offered to settle litigation with companies including Vodafone and Cairn Energy and refund the taxes collected if they agree to withdraw litigation in all forums and forgo any damages, interest or other costs. Cairn Energy has already agreed to settle the matter with India.