Home/ Economy / Govt nullifies retro tax; introduces Bill to amend Income Tax Act

The Indian government on Thursday has finally moved to bury the ghost of retrospective tax as it proposed a Bill to amend the Income Tax Act.

Finance Minister Nirmala Sitharaman introduced The Taxation Laws (Amendment) Bill in the Lok Sabha today.

"The Bill proposes to amend the Income-tax Act, 1961 so as to provide that 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 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President)," the Finance Ministry said in a statement.

"It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of specified 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 is also proposed to refund the amount paid in these cases without any interest thereon," the government stated.

"The Bill also proposes to amend the Finance Act, 2012 so as to provide that 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," it stated further.

"In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment," government further said.

This bill impacts retro tax cases of at least two big companies -- Cairn Energy Plc and Vodafone Group of UK. Both firms had won international arbitrations against levy of retrospective taxes on them.

The proposal comes in the midst of India's Cairn Energy arbitration case, where the British oil and gas energy is seeking to recover $1.2 billion from New Delhi. However, the government on Monday said it has not received any formal proposal from them to resolve the issue within the country's legal framework.

Later during the day, Cairn Energy issued a statement saying it is monitoring the situation.

"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," it said in a statement.

Finance Secretary T V Somanathan said a total of 8,100 crore was collected using the retrospective tax legislation. Of this, 7,900 crore was from Cairn Energy alone. This money will be repaid.

"The government's policy since 2014 has been that we do not support retrospective taxation. We need to also remember that this is a time when India needs a lot of investment. These were legacy disputes which dated back pre-2014," Somanathan said.

He said the government defended in arbitration India's sovereign right to tax and waited for the cases to reach their logical conclusion. "So it has been a balancing effort between the principle of sovereign right to tax and relief to those on whom taxes were due."

Revenue Secretary Tarun Bajaj said: "After reaching some conclusion in arbitration proceedings, we have taken this bold step to assure investor community about predictability in the tax regime."

The retrospective taxation continued to be a sore point and hence the government has voluntarily decided to bring in this bill to nullify all retro tax demands, he said.

"You cannot question India's sovereign right to tax, but as a matter of policy, we will not pursue retrospective taxation cases. It is not a question of 8,000 crore (which has been collected through this retro tax), but the intent of the government that it does not believe in retro taxation," he said.

Ved Jain, former president, ICAI, said this will settle the issue of arbitration.

"The full amount of tax will have to be refunded but without interest as a specific provision has been inserted of no interest on such refund under section 244A. Demand created before May 28, 2012 will be nullified in 17 cases including two cases where there is a stay. Undertaking to be furnished by these entities that no claim, damages, interest etc shall be filed," he said.

Neeru Ahuja, Partner, Deloitte India, said the bill is a welcome step.

"The amendment is setting right wrong which was done many years ago. It will go away now. Lots of disputes repeated to indirect transfers will be settled now and litigations will go away with the introduction of this bill. It is win-win for both companies and the government as well. This is a big step towards bringing more certainty. This will boost investor confidence," Ahuja said.

"This is a big development and will surely put a lot of uncertainty to rest," said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.

“This is indeed a very pragmatic step by the Government and should help it contain the widespread litigation in cases similar to Vodafone and Cairn. A worthy battle to lose," said Kumarmanglam Vijay, Partner, J Sagar Associates.

"This move will help restore India's reputation worldwide and put an end to unnecessary litigation," said Abhishek Soni, Co-founder & CEO, Tax2win.

Further, the government's statement read, "The issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company (hereinafter referred to as "indirect transfer of Indian assets") was a subject matter of protracted litigation. Finally, the Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act."

In 2012, after the Supreme Court ruled that the Vodafone Group’s interpretation of the Income-Tax Act of 1961 was correct and that it did not have to pay any taxes on the stake purchase, then Finance Minister Pranab Mukherjee circumvented the ruling by proposing an amendment to the Finance Act, which gave the I-T Department power to retrospectively tax such deals. The Act was passed by Parliament that year, and the onus of paying the tax fell back on Vodafone.

What's retrospective tax?

The UPA government decided to impose capital gains tax retrospectively on some companies, such as Cairn and telecoms operator Vodafone Plc.

India's retrospective tax was introduced in 2012 and made any capital gains resulting from the transfer of shares from a foreign entity whose assets were located in India taxable from 1962.

An international arbitration tribunal in The Hague last year ruled that India’s imposition of a tax liability on Vodafone, as well as interest and penalties, breached of an investment treaty agreement between India and the Netherlands.

Click here to read the full text of the Bill.

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Updated: 05 Aug 2021, 07:52 PM IST
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