In a major relief for global investors, the government on Thursday proposed amendments to the Income-Tax Act and Finance Act, 2012 to scrap the controversial policy of retrospective taxation.
What is retrospective taxation?
It is a form of taxation introduced by then Finance Minister Pranab Mukherjee through an amendment in the I-T Act during the Union Budget of 2012-2013 to charge an investor taxes for transactions done in the past under the existing policy.
It was introduced to make adjustments between the different taxation policies in the past and present under the premise that taxes paid under policies in the past were quite less compared to the present.
The amendment, made to Section 9(1) of the I-T Act, aimed to generate tax demands on income through or from the transfer of assets or capital assets in India following the transfer of a share or interest in a company or entity registered or incorporated outside India.
The amendment was made in response to a Supreme Court verdict that said that Vodafone cannot be taxed for a transaction made in 2007, involving the purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion.
While the decision drew resistance from taxpayers and also from Mukherjee’s colleagues including then prime minister Manmohan Singh, it made global investors wary of putting their money in businesses in India.
The government in 2014 yet again exercised the amendment to impose tax on Cairn energy for an internal corporate restructuring in 2006. Tax demands were raised in 17 cases, including against Vodafone and British gas major Cairn Energy.
The Centre collected ₹8,100 crore in taxes under the existing law including ₹7,800 crore from Cairn Energy alone.
NDA’s seven-year wait
Even though the NDA called the amendment “tax terrorism”, it didn’t take any solid steps to scrap the regimen after coming to power in 2014. While presenting the Budget in July 2014, then finance minister Arun Jaitley clarified that the government will not levy any “retrospective tax creating fresh liabilities.”
“Retrospective tax was created by you. This mess of tax terrorism was yours and we are trying to bring civility back by clearing it,” he said, taking a swipe at the former UPA government.
Jaitley had said that any fresh cases connected to the retrospective amendments will be scrutinised by a high-level committee before any tax is levied.
“…consequent upon certain retrospective amendments to the Income Tax Act 1961, undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion,” he said.
Even though Jaitley commented that the taxation regimen will scare away investors, the NDA government had dragged its feet on scrapping the tax even as the cases continued in courts.
How the current decision came about?
Despite keeping mum on the amendment for almost seven years since it came to power, the government’s decision to finally scrap the law is being seen as a move to tackle the recent arbitration case against Cairn Energy.
The Permanent Court of Arbitration at The Hague last month asked India to pay the UK-based firm $1,232.8 plus interest and $22.38 million towards arbitration and legal costs, failing which the company would freeze its assets in Paris.
The Union Finance Ministry had said that India’s “sovereign right to taxation” cannot be questioned on global platforms, with government officials adding that the Centre will not accept the arbitration award, but find a solution to put in place a more transparent tax regime for investors, both domestic and foreign.
Cairn Energy, which initiated the process to seize Indian assets in May, brought a lawsuit in the US against Air India. In July, a French court gave permission to the company to freeze 20 Indian government properties in Paris valued at over 20 million euros.
The international tribunal in September last year, had also ruled that India’s imposition of retrospective tax of ₹22,100 crore as capital gains and withholding tax on Vodafone for the 2007 deal was “in breach of the guarantee of fair and equitable treatment”.
What the bill offers?
The bill provides for the withdrawal of tax demand made on “indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012”.
The bill proposes to “provide that the demand raised for indirect transfer if Indian assets made before 28th May, 2012 shall be nullified on fulfillment 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”.
The government through the bill has also proposed to refund money collected from taxpayers including Vodafone and Cairn Energy ($1.2 billion) under the taxation system. However, the government has clarified that it will not pay any interest on the amount.
Experts say the bill when becomes effective would boost foreign investment in India.