India / Govt moves to end retrospective tax behind Cairn, Vodafone controversies

New Delhi: Finance Minister Nirmala Sitharaman on August 5 tabled the Taxation Laws Amendment Bill in Lok Sabha, which seeks to withdraw the contentious retrospective tax more than nine years after it came into force

The move will come as a relief to companies like Cairn Energy and Vodafone, and is likely to end their long-standing legal dispute with the Centre.

"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,” Sitharaman said in a written statement along with the bill.

May 28, 2012, was the date when the 2012 Finance Act, which gave legal backing to retrospective taxation, was assented to by then President Pratibha Patil, after being announced by then Finance Minister, the late Pranab Mukherjee.

”This is a bold move that addresses the concerns of many foreign investors. It also puts to an end many of the past arbitration cases pending which have created great embarrassment for India in international circles,” said Rohinton Sidhwa, Partner, Deloitte India.

Sitharaman said that the demand raised for indirect transfer of Indian assets made before May 28, 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.

A top official told Moneycontrol that this means that apart from withdrawing cases, companies like Vodafone, Cairn and others will have to give an undertaking that they will not seek legal damages, recoup legal costs or file cases related to restrospective taxes against the government in the future.

The official clarified that upon fulfilling such conditions, the Centre will pay back the principal amount.

‘Intent was clear from top political leadership’

After Prime Minister Narendra Modi came to power in 2014, there was a demand from many stakeholders for the government to repeal the retrospective tax. However, former finance minister Arun Jaitley had assured that it would be used to pursue only pending assessments. No new cases of retrospective taxes were raised under the Modi government.

However, the need to finally repeal the controversial tax became relevant after the latest setbacks in Cairn’s international arbitration against the Centre.

“The intent was clear from the top political leadership, that retrospective taxes had to go. The amount sought paled in comparison to the hit that India’s reputation as an attractive investment destination took,” the official quoted above said.

Sitharaman said in that the past few years, major reforms have been initiated which has created a positive environment for investment in the country. “However, retrospective taxation and consequent demand created in a few cases continue to be a sore point with potential investors,” she said.

“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,” the finance minister said.

The move by the Centre paves way for companies, including Vodafone and Cairn, to withdraw the litigation in Indian and international courts, with the assurance from the government that its demand for retrospective tax will also be withdrawn.

“This is a welcome step. It recognises the importance of certainty in tax laws which is a key factor in ensuring confidence in India as an attractive investment destination. The step could help restore India's reputation as a fair and predictable regime apart from helping put an end to unnecessary, prolonged & expensive litigation,” said Pranav Sayta, Tax Partner, EY.

The government says that retrospective tax demand has been raised in seventeen cases. In two cases assessments are pending due to stay granted by the High Court. Out of the said seventeen cases, arbitration under Bilateral Investment Protection Treaty with the United Kingdom and the Netherlands had been invoked in four cases. These include Vodafone and Cairn. In two cases, the Arbitration Tribunal ruled in favour of taxpayers and against the Income Tax Department.

Breather in big retrospective tax cases

Finance Secretary TV Somanathan told CNBC TV-18  that the message is that "India is committed to predictability in taxation.”

The proposed Bill lays down the procedure for tax refunds subject to conditions, he said, adding that it "represents the best way forward" and offers a "fair solution" to companies who have objected to the retro tax law.

Somanathan clarified that around Rs 8,100 crore has been collected so far in the form of retrospective tax, "which includes over Rs 7,000 crore collected from Cairn UK".

However, the demand by the Centre has been much more than that. The Centre has demanded Rs 22,100 crore from Vodafone including retrospective tax, back taxes, penalties and interest.

The government is seeking upwards of Rs 30,700 crore from Cairn in penalties for its alleged failure to pay Rs 10,247 crore capital gains tax on time. Last year, the Permanent Court of Arbitration at The Hague asked India to return $ 1.2 billion to Cairn, plus interest of $500 million.