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With the government proposing to repeal the ‘retrospective tax’ amendment introduced in the Union Budget 2012-13, a 14-year-story has come to an end. From the perspective of potential investors and global corporates litigating with the government, it is a pleasant end.

The story began in 2007 when Vodafone acquired Hutchison Essar, the telecom company, for $11 billion. Although the deal did not take place in India, Vodafone was slapped with a huge income tax demand. After a protracted legal battle, Vodafone was given relief by the Supreme Court, which ruled that the Indian authorities could not tax a deal executed in Cayman Islands.

It was this verdict that led to the 2012 changes in the Income Tax Act, which brought these indirect corporate transactions in the tax net. If an Indian asset was held by a foreign company and an acquirer bought this holding company, such a transaction was deemed to be taxable in India because the underlying asset was located in India. More importantly, this change was made retrospectively from 1962, which obviously sought to bring the Vodafone transaction in the tax net, apart from other deals.

The retrospective applicability of this provision met with sharp criticism. No less than then British PM Gordon Brown raised his concerns with India. Taxation is a sovereign right and it isn’t usual for heads of state to comment on taxation decisions of other countries.

On 5 August, the ghost of this retrospective tax has been finally laid to rest. The government has introduced The Taxation Laws (Amendment) Bill, 2021 to undo this insidious provision from the Finance Bill, 2012. This will potentially help resolve 17 cases in which income tax demand had been raised. In two high profile cases—Cairn and Vodafone—the corporate entities had already won various legal and arbitration awards.

The clawback of the retrospective clause is comprehensive. The government will not raise tax demands in any such case if the transaction occurred before 28 May 2012. Any demand already raised will be withdrawn and any taxes collected will be paid back for the principal amount. In the cases where litigation is pending, this will be done after the impacted corporate party gives an undertaking not to contest the case further.

A key feature of this decision is that all cases, and not just the two large ones with Cairn and Vodafone, can now get relief. Had the government chosen only to not appeal the two specified case or accepted the arbitration awards, it would have settled these cases, but would have left the other 15 in a lurch.

The decision hence goes a step forward in potentially restoring the trust with Cairn and Vodafone, but also offering a closure for other impacted cases. Of course, both the firms, which had won interest and costs in arbitration award, can still pursue litigation rather than accept the middle path offered by the government. But with their India business footprint and option to expand in key industries, they may well choose to accept the offer. This should be clear either way in the coming weeks.

This is a welcome move and also a practical implementation plan. The government is putting to rest the concept of retrospective taxation and is also creating visibility and stability for the future. The most important aspect of any tax regime is its predictability and this decision helps bring that. It also reiterates India’s commitment to honour the rule of law and treaties.

Also, it is not that the amendment only favours foreign companies. The Indian entities who were buyers of shares of foreign companies were also made liable retrospectively under the same 2012 amendment for Tax Deducted at Source and tax demands were raised against them. These Indian companies shall also benefit from the decision.

The tax on the indirect sale of assets located in India still stays on the statute books, but it is fully visible to and understood by any parties looking to enter into such a transaction.

India has expressed strong ambition for an Aatmanirbhar Bharat. Apart from the various reform measures and incentives being offered, the sanctity of contracts is a key factor that any investing entity will look at when deciding on expanding business operations in India. The government’s move would help build confidence.

The move is simultaneously correct, pragmatic and courageous. Retrospective tax was against the very basis of international commitments. As the post-covid recovery picks up, focus needs to be on the future rather than keeping a sword of uncertainty for the past dangling on potential investors. Such a decision needs political capital and ownership, which comes through strongly in this case.

Aashish Chandorkar is counsellor-designate to India’s permanent mission to the World Trade Organization at Geneva and writes on public policy.

These are the author’s personal views.

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