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Explained | Why is retrospective tax being scrapped?

Hurdle removed: The Centre has brought in a Bill to nullify the provision for retrospective tax.   | Photo Credit: Getty Images/iStockphoto

The story so far: On Thursday, Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill in the Lok Sabha to nullify the tax clause provision that allows the government to levy taxes retrospectively. The government has been fighting legal cases against Vodafone and Cairn Energy on taxes it has claimed retrospectively on transactions these entities entered into relating to operations in the country. Both the U.K.-based companies have won international arbitration rulings that held the Indian government in breach of bilateral investment protection agreements with the Netherlands and the U.K. respectively.

What is the genesis of the retrospective tax imbroglio?

In May 2007, Vodafone bought Hong Kong-based Hutchison Whampoa’s controlling stake in Hutchison Essar for $10.9 billion. The transaction took place in the Cayman Islands where Hutchison’s HTIL unit owned 100% of CGP Investments (the actual stakeholder in Hutchison Essar), which in turn was acquired by Vodafone’s Netherlands-based Vodafone International Holdings. That September, India’s Income Tax Department served a notice on Vodafone for failing to deduct tax at source from the amount it paid to Hutchison in lieu of the capital gains tax it contended the seller Hutchison was liable for. The case went to court. In January 2012, India’s Supreme Court backed Vodafone, ruling that indirect transfer of shares to a non-Indian company would not attract tax in India. Separately, in 2006-07, Cairn Energy U.K. had reorganised its Indian oil and gas exploration business ahead of a planned IPO in India and subsequently sold part of its stake in Cairn India Ltd., first to Malaysia’s Petronas, and then the Vedanta Group during the 2009-11 period.

Editorial | Rewind to fast forward: On retrospective tax

In the Union Budget of 2012, the then Finance Minister, Pranab Mukherjee, introduced an amendment to the Finance Act, which allowed the government to retrospectively tax such transactions. In 2014, the Income Tax Department froze Cairn’s remaining shares in Cairn India. The next year, Cairn initiated international arbitration against the government under the India-U.K. bilateral investment treaty. In 2018, the Income Tax Department also took over the U.K. firm’s 5% stake in Vedanta. These shares were later sold, while tax refunds amounting to $223 million were withheld in another transaction. It also seized dividends worth $159 million due to Cairn Energy U.K.

What are the proposed changes?

The Bill proposes to do away with retrospective taxation on the sale of assets in India by foreign entities executed before May 2012, with a caveat — the companies that will benefit from the amendment must withdraw all legal cases against the government and forfeit interest, costs and any damages. The government, on its part, is willing to refund any tax dues it may have collected or seized. At ₹7,900 crore, the amount transferable to Cairn Energy takes up the bulk of the total ₹8,100 crore of such proposed refunds.

Why did the government decide to rescind the provision?

Though the government had raised tax demands in 17 such cases, Vodafone and Cairn attracted the most attention. Both initiated international arbitration under bilateral agreements. Vodafone got a favourable ruling in September 2020 at the Permanent Court of Arbitration at The Hague in the ₹22,000-crore case. In December, an Arbitral Tribunal ruled in favour of Cairn, awarding it $1.2 billion plus interest and costs in damages, which came to $1.7 billion in total. India has appealed against both rulings. This year, Cairn had applied in courts in the U.S., Canada, Singapore, Mauritius and the Netherlands for seizure of Indian assets such as the state-owned national carrier Air India's aircraft. It also obtained a legal order in France freezing some real estate assets owned by India in Paris, valued at about $24 million. Though the cases are in appeal, the loss of the arbitration cases and Cairn’s pursuit of India’s assets abroad may have forced the government’s hand. The Bill says: “It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination... 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...”


How are global investors likely to react?

Even after the Bill becomes law, entities such as Cairn Energy must convince its shareholders and accept the caveats. Prospective investors, however, may take heart from the fact that the government has shown the intent not to claim tax retrospectively and demonstrated a willingness to undo a measure that was seen as hurting the inflow of foreign investment.

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Printable version | Oct 19, 2021 6:38:38 PM | https://www.thehindu.com/business/Economy/explained-why-is-retrospective-tax-being-scrapped/article35790901.ece

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