The government took the first step towards doing away with the contentious retrospective tax law of 2012, which was used to raise large tax demands on foreign investors like Vodafone and Cairn Energy.

Retrospective Tax Law: A backgrounder

• The roots of this law date back to 2007, when Vodafone bought over a majority stake in the telecom operations of Hutch in India for $11.1 billion.
• While the deal involved the changing of hands of Indian operations of Hutch, the companies party to it were registered outside India and all the paperwork and financial transactions, too, were done outside the country.
• But the Indian government ruled that Vodafone was liable to pay capital gains tax to it as the deal involved the transfer of assets located in India.
• Importantly, there was no rule in the Indian statutes then that allowed such taxation.
• Vodafone challenged this claim and the case went to Supreme Court, which ruled in 2012 that there was no tax liability on Vodafone’s part to Indian authorities.

What was the law made then?

• In 2012, Parliament amended the Finance Act to enable the taxman to impose tax claims retrospectively for deals executed after 1962 which involved the transfer of shares in a foreign entity whose assets were located in India.
• The target, of course, was the Vodafone deal. Very soon, tax claims were also raised on Cairn Energy.

How did the Companies react?

• The changes to the Finance Act allowed India to reimpose its tax demand on Vodafone.
• Tax authorities had slapped a tax bill of Rs 7,990 crore on Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.
• By 2016, reports say, the bill had risen to Rs 22,100 crore after adding interest and penalty.
• The demand on Cairn was for Rs 10,247 crore in back taxes over its move, beginning in 2006, to bring its Indian assets under a single holding company called Cairn India Ltd.
• A few years later, when Cairn India Ltd floated an IPO to divest about 30 per cent of its ownership of the company, mining conglomerate Vedanta picked up most of the shares.
• However, Cairn UK was not allowed to transfer its stakes as Indian officials held that the company had to first clear the tax liability.

Note: This story is of no use to aspirants. But one must understand how such cases create regression for the Indian economy in the long run.

A case in the Hague

• That prompted Cairn UK to move the Permanent Court of Arbitration to The Hague, Netherlands.
• It said that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it.
• The treaty provides protection against arbitrary decisions by laying down that India would treat investment from the UK in a “fair and equitable” manner.
• Vodafone, too, had sought arbitration before the Permanent Court of Arbitration, citing the “fair and equitable” treatment clause in the India-Netherlands BIT.

India’s response

• In September last year, the Hague court ruled in favour of Vodafone, quashing India’s tax claim after holding that it violated the “equitable and fair treatment standard” under the bilateral investment treaty.
• India refused to pay the compensation, Cairn launched recovery proceedings across countries as part of which a French court ordered the freezing of some Indian assets in Paris.
• This move discourages foreign investors from coming to India and that the Centre should look to resolve the case at the earliest.
• The amendments now mooted are designed to do just that.

Taxation Laws (Amendment) Bill, 2021

• The Bill offers to drop tax claims against companies on deals before May 2012 that involve the indirect transfer of Indian assets would be “on fulfilment of specified conditions”.

Various conditions:

• The condition includes the withdrawal of pending litigation and the assurance that no claim for damages would be filed.
• As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped, and any taxes already collected shall be repaid, albeit without interest.
• To be eligible, the concerned taxpayers would have to drop all pending cases against the government and promise not to make any demands for damages or costs.

Why is the amendment necessary?

• The retrospective taxation was termed “tax terrorism”.
• It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination.
• This could help restore India’s reputation as a fair and predictable regime apart from helping put an end to taxation.

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