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Business News/ News / India/  Govt brings bill to scrap retrospective taxation
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Govt brings bill to scrap retrospective taxation

Legislation may help govt settle row with Cairn, Vodafone and 15 other companies
  • FM Nirmala Sitharaman said tax demands based on retrospective clarificatory amendment are a sore point with potential investors
  • Vodafone won a row with the govt over a $3 bn tax demandPremium
    Vodafone won a row with the govt over a $3 bn tax demand

    In a surprise move, finance minister Nirmala Sitharaman on Thursday tabled a bill in the Lok Sabha that is likely to help settle festering disputes with Cairn Energy Plc, Vodafone Group Plc and 15 other companies over retrospective tax demands by the government.

    The Taxation Laws (Amendment) Bill, 2021, seeks to nullify the tax claims raised based on retrospective use of an anti-evasion tax law amendment introduced in 2012. That legislative change aimed to make offshore transactions involving Indian assets, including those executed prior to the change in law, taxable in India.

    Conditions apply
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    Conditions apply

    According to the new bill, tax claims made on offshore transactions executed before 28 May 2012, when the amendment to the Income Tax Act brought out by the previous United Progressive Alliance government took effect, will be nullified, subject to riders. However, offshore transactions involving Indian assets executed after 28 May 2012 are still taxable as there is no retrospective application of the law.

    In a statement explaining the bill’s provisions, Sitharaman said the conditions for dropping the tax claims included withdrawal or undertaking to withdraw pending litigation and undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed by the disputing party. For amicable settlement of the disputes, the government will also refund the amount paid in these cases without any interest.

    The government was ordered to return $1.7 billion to Cairn Energy after it lost arbitration proceedings. The company subsequently secured a freeze order on Indian assets from a Paris court. Vodafone Group also won a similar tax dispute with the government over a $3 billion tax demand.

    On Thursday, Cairn Energy acknowledged the development but declined to comment on its course of action immediately.

    “We have noted the introduction to the Indian parliament of the Taxation Laws (Amendment) Bill 2021, which proposes certain amendments to the retrospective taxation measures that were introduced by the Finance Act 2012. We are monitoring the situation and will provide a further update in due course," a statement from Cairn Energy said.

    Vodafone Group declined to comment. The other tax disputes triggered by the retrospective amendment relate to Vedanta Resources’ purchase of a controlling stake in Sesa Goa, SABMiller’s acquisition of Foster’s India and Sanofi Pasteur Holdings’ acquisition of Shanta Biotech.

    The 2012 amendment to the Income Tax Act aimed to check the practice of Indian businesses held under entities incorporated abroad changing hands without involving a capital gains tax liability here. However, this was introduced as a clarification, which was applied to past transactions, too. That included the Dutch arm of Vodafone Group buying a Cayman Islands-based company in 2007, which indirectly held a majority stake in Indian firm Hutchison Essar Ltd—later renamed Vodafone India—for $11 billion. It also covered Cairn Energy’s internal restructuring of its India unit in 2006-07 before it went public. The tax law amendment was aimed at tackling complex transactions that manage to escape taxation in India.

    Sitharaman said the 2012 clarificatory amendment had invited criticism for its retrospective effect and that it was argued that it militated against the principle of tax certainty and damaged India’s reputation as an attractive destination. The minister said reforms in the past few years had created a positive environment for investment, but the few tax demands based on retrospective clarificatory amendment continues to be a sore point with potential investors. “The country today stands at a juncture when quick recovery of the economy after the pandemic is the need of the hour, and foreign investment has an important role to play in promoting faster economic growth and employment," Sitharaman said in the note.

    However, several recent reversals in global arbitration tribunals might have prompted the government to withdraw the tax claims. Despite Narendra Modi’s criticism of retrospective taxation introduced by the previous regime before he came to power in 2014, his government continued to pursue such claims.

    This is a welcome move for foreign investors and is in line with the government’s commitment to creating a non-adversarial tax environment, said Sudhir Kapadia, national tax leader, EY India.

    “It seems a good opportunity for the affected taxpayers to close all the past disputes and avoid future litigation costs," said Kapadia.

    The full amount of tax will have to be refunded for settling the cases, but without interest, explained Ved Jain, former president of the Institute of Chartered Accountants of India.

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    Gireesh Chandra Prasad
    Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 05 Aug 2021, 07:31 PM IST
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