New Delhi, March 26 (PTI): The tax department will waive interest liability if the principal demand of capital gains tax is paid by companies such as Cairn India and Vodafone plc.

The Central Board of Direct Taxes (CBDT) on March 24 issued a circular for the waiver of interest in disputed tax demand in different scenarios. In cases where the tax liability arose because of retrospective amendment to the law or a court ruling, the interest payable on the demand will be waived.

"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 the chief commissioner of income tax and the director-general of income tax said.

The guidelines came seven weeks after the direct tax dispute resolution scheme, announced by finance minister Arun Jaitley on February 28 last year, closed.

The scheme, which closed on January 31, provided for the 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all appeals against the government challenging constitutional validity of back-dated amendment to income tax laws are withdrawn.

Vodafone faces a Rs 14,200-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 the Indian business in 2007.

The UK's Cairn Energy Plc has been slapped with over Rs 29,000 crore in tax demand, including Rs 10,247 crore in principal due, for alleged capital gains it made in 2006 when it transferred its India business into a new subsidiary, Cairn India, and got it listed. 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 company Cairn Energy in 2006-07 when it reorganised India business.