Home / Opinion / Views /  A pragmatic laying to rest of the retrospective tax ghost

With India’s government having moved to repeal the ‘retrospective tax’ amendment introduced in the Union Budget for 2012-13, a 14-year story has come to an end. From the perspective of potential investors and global corporations pursuing tax litigation against the government, it is a pleasant end.

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

It was this verdict which led to the 2012 changes to India’s Income Tax Act, which brought such indirect corporate transactions into the country’s 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 applicable from 1962, a decision that clearly sought to make the Vodafone transaction taxable, apart from other such deals.

The retrospective applicability of this provision met with sharp criticism. No less than then-UK Prime Minister Gordon Brown raised his country’s concerns with India. Taxation is a sovereign right and it is not usual for heads of state to comment on taxation policy decisions taken by other countries.

On 5 August, the ghost of this retrospective tax was laid to rest. The government introduced The Taxation Laws (Amendment) Bill, 2021, to undo the insidious provision from the Finance Bill of 2012. It was passed in the Lok Sabha the next day, with little doubt over its clearing the Rajya Sabha and being enacted. This will potentially help resolve as many as 17 cases in which such income tax demands had been raised. In two high-profile cases, Cairn Energy and Vodafone Plc, the corporate entities contesting the tax demands had already won various legal and arbitration awards.

The clawback of the retrospective clause is comprehensive. The government will not be raising tax demands in any such case if the transaction occurred before 28 May 2012. Any demand already raised will be withdrawn and the principal amount of any taxes collected will be paid back.

In cases where litigation is pending, this will be done after the impacted corporate party gives an undertaking to the effect that they will not contest the case further.

A key feature of this decision is that all cases, and not just the two large ones of Cairn Energy and Vodafone, can now get relief from India’s retrospective tax demands. Had the Indian government chosen only to not appeal the two specified cases, or accepted the relevant arbitration awards, it would have managed to settle these cases, but would also have left the other 15 in a lurch.

The decision hence goes a step forward in potentially restoring the trust of Cairn and Vodafone in Indian taxation policy, but also offering closure for other retro-tax cases. Of course, both those firms, which had won interest and costs in arbitration awards, can still pursue litigation rather than accept the middle path offered by the government. But given their business interests in the country, they may well choose to accept the offer. Their choice should be clear in the coming weeks.

Laying the retrospective tax ghost to rest is a welcome move that embodies a practical implementation plan. In putting an end to the concept of retrospectively-applied taxes, the government has created conditions for policy stability in the future. The most important aspect of any tax regime is its predictability and this serves that purpose. The decision also reiterates India’s commitment to honour the rule of law and international treaty commitments.

Also, it is not that the amendment only favours foreign companies. Indian entities that bought shares of foreign companies were also made liable retrospectively under the 2012 amendment for tax deducted at source and tax demands were raised against them. These Indian companies shall also benefit from this decision, subject to the fulfilment of prescribed conditions.

The taxation of indirect sales of assets located in India still stays on the country’s statute books, but it is fully visible and understood by all parties looking to make any such transaction.

India has expressed its ambition of an Atmanirbhar Bharat, a self-reliant country. Apart from various reform measures and incentives being offered, the sanctity of contracts is a key factor that any investor looks at before making a decision to invest in a new venture or expand business operations in the country. The end of retrospective taxation will help raise that confidence.

The move is simultaneously correct, pragmatic and courageous. A retrospective tax went against the grain of our international commitments. As the post-pandemic recovery picks up and we embark on a project of rebuilding, our focus needs to be on the future, rather than keeping a sword of uncertainty dangling over potential investors for past deals. Such decisions require political capital, and the government has done well to use its reserves.

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

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