GoI proves it is investor friendly by burying regressive retrospective tax law

ANALYSIS
GoI proves it is investor friendly by burying regressive retrospective tax law
The GoI has, through a bill introduced in the Lok Sabha by Finance Minister Nirmala Sitharaman, sought to withdraw retrospective tax demands made on companies prior to May 28, 2012. That was the date on which the Congress-led UPA government’s retrospective tax became law.Courtesy: Getty Images

Indian Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill 2021 in India’s lower house of Parliament to undo the damage caused by the Congress-led UPA government-era amendment to the IT Act to tax transactions that had taken place prior to 2012.

The Indian government finally decided to bury the ghost of the retrospective tax issue that has haunted India since former Finance Minister, (later President of India) the late Pranab Mukherjee, amended the Income Tax Act 1961 to insert this amendment in 2012 that most tax experts have called regressive.

In a surprise move that caught almost everybody by surprise, Indian Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill 2021 in the Lok Sabha, India’s lower house of Parliament. The Bill seeks to withdraw retrospective tax demands made on companies prior to May 28, 2012. That was the date on which the Congress-led UPA government’s retrospective tax became law.

This Bill comes at a time when India has lost two back-to-back cases against Vodafone and Cairn Energy plc, which had dragged the government before international arbitration panels. Once it becomes law, it will put an end to disputes with 15 multinationals including the two most high-profile cases with Vodafone and Cairns but also with the likes of US major GE, Japan’s Mitsui Corporation, Sanofi Corporation and SAB Miller, among a host of others.

In a surprise move that caught almost everybody by surprise, Indian Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill 2021 in the Lok Sabha, India’s lower house of Parliament. The Bill seeks to withdraw retrospective tax demands made on companies prior to May 28, 2012.
The tax Bill comes close to a time when the GoI has lost two back-to-back cases against Vodafone and Cairn Energy plc. Finance Minister Nirmala Sitharaman, seen yesterday in the Lok Sabha, has sought to undo a provision that has damaged India’s standing as a friendly investment destination.
The tax Bill comes close to a time when the GoI has lost two back-to-back cases against Vodafone and Cairn Energy plc. Finance Minister Nirmala Sitharaman, seen yesterday in the Lok Sabha, has sought to undo a provision that has damaged India’s standing as a friendly investment destination.Courtesy: ANI

The background

The saga of retrospective taxes began, as mentioned above, in 2012. Hutchison, the Hong Kong-based conglomerate, had sold its two-third stake in its mobile telecom business in India to UK’s Vodafone for close to $11 billion (at the then prevailing exchange rates). The transaction took place in foreign tax havens, where the company holding shares in the Indian telco was based.

A demand by the Income Tax department that Vodafone should have deducted tax at source before paying Hutchison for the transaction, on the ground that the underlying assets were held in India, was disputed by the UK company and challenged in Indian courts. It was finally struck down by the Supreme Court, which said quite categorically the demand notice lacked the authority of any law.

It was to overturn this judgment that Mukherjee introduced the retrospective amendment and opened a Pandora’a Box.

Vodafone Global CEO Nick Read leaves Parliament House after meeting with Finance Minister Nirmala Sitharaman in New Delhi last year. Once the retrospective tax bill becomes law, it will put an end to disputes with 15 multinationals including the two most high-profile cases with Vodafone and Cairns but also with the likes of US major GE, Japan’s Mitsui Corporation, Sanofi Corporation and SAB Miller.
Vodafone Global CEO Nick Read leaves Parliament House after meeting with Finance Minister Nirmala Sitharaman in New Delhi last year. Once the retrospective tax bill becomes law, it will put an end to disputes with 15 multinationals including the two most high-profile cases with Vodafone and Cairns but also with the likes of US major GE, Japan’s Mitsui Corporation, Sanofi Corporation and SAB Miller.Courtesy: ANI

What the Bill says

Undoing a provision that has greatly damaged India’s standing as a friendly investment destination, the Bill says: “No tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.”

Undoing a provision that has greatly damaged India’s standing as a friendly investment destination, the Bill says ‘no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012’.

There are, however, some conditions that have to be met before disputes such as the ones pending with Vodafone and Cairns can be finally resolved.

The Bill states: “Any demand raised for indirect transfer of Indian assets made before May 28, 2012, shall be nullified on fulfilment of specific conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc shall be filed.”

It also has a provision that says: “The validation of demand, etc., under Section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc., shall be filed,” as per the bill.

Government will refund amounts seized

“It is also proposed to refund the amount paid in these cases without any interest thereon,” the Bill says.

If the Bill is passed without amending this part, the government will have to refund Cairn a little more than $1 billion that it had seized – in the form of shares in the company and dividends due on them.

The retrospective amendment had snared some of the world’s biggest multinationals in its net, though India’s public exchequer has not benefitted much save for the forfeitures of Cairn shares and dividends.

These will now have to be repaid, albeit without any interest.

The retrospective tax amendment, which has been described as “regressive”, “arbitrary” and “investor-unfriendly”, among other things, was expected to be overturned when Modi won an overwhelming majority in the 2014 general elections. Seven years later, that expectation is on the way to becoming reality.

The Cairn case

Last year, in separate and unrelated proceedings, the International Arbitration Tribunal in The Netherlands ruled that India must not make any more attempts to recover the "tax liability, interest or penalties" from Cairn and Vodafone.

Cairn, which was awarded $1.2 billion in damages, has been pursuing Indian assets in the US, France and other foreign jurisdictions. It has reportedly obtained orders from a French court to seize 20 properties belonging to the Indian government and is also pursuing assets owned by Air India.

This new Bill, if passed into law, will make such claims redundant.

The retrospective tax amendment, which has been described as “regressive”, “arbitrary” and “investor-unfriendly”, among other things, was expected to be overturned when Modi won an overwhelming majority in the 2014 general elections.

Seven years later, that expectation is on the way to becoming reality.

That will go a long way in burnishing India’s reformist credentials.

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