Lok Sabha passed a law on Friday to abolish the controversial retroactive tax introduced in March 2012. It has taken several years for the NDA government to finally get rid of the controversial tax rule – a move welcomed by a host of economists and overseas corporations.
The bill was tabled on Thursday amending the Income Tax Act 1961 and aims to remove tax claims for previous payments by companies.
The government has also agreed to resolve ongoing disputes and pay refunds to companies penalized under the controversial law.
RETROSPECTIVE TAX LAW COMPLETED – A BRIEF HISTORY
The retroactive taxation law was introduced into the 2012-13 Union budget by Pranab Mukherjee, then Minister of Finance in the UPA government.
It was introduced after an amendment to the Finance Act allowed the Tax Department to impose retroactive capital gains tax on business after 1962 – involving the transfer of shares in foreign companies based in India.
The retroactive tax law was passed in 2012 following a Supreme Court ruling in favor of the US-based Vodafone. It all started when Vodafone acquired 67 percent of the shares in Hutchison Whampoa in India in 2007 for over $ 11 billion.
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It should be noted that the legal and other documentation for the transaction was prepared outside of India, but the Government of India said Vodafone was required to pay capital gains tax on the transaction as it involved the transfer of assets located in the country.
Vodafone had challenged this tax claim before the Supreme Court and obtained a judgment in its favor in 2012. The amendment was passed by the government shortly after the ruling.
IMPORTANT RETRO TAX CASES
While the change was only aimed at punishing Vodafone, many other companies got caught in the crossfire and have caused many problems for India over the years. It remains one of the most controversial changes to the Income Tax Act.
According to some reports, after the retroactive tax law was passed, Vodafone was initially asked to pay nearly Rs.8,000 billion. The demand for additional interest and penalties rose to over Rs.22,000 billion in 2016.
Cairn Energy Plc was another company fined under the retroactive tax law. Cairn was asked to pay retrospective taxes for bringing all of its Indian assets under a single holding company, Cairn India Ltd.
As part of the 2006-2007 asset restructuring, Cairn UK had to acquire shares in Cairn India Ltd. transfer. However, the company did not have to pay any taxes for the restructuring process, which included the transfer of the shares.
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This was done in preparation for the local units to go public. A significant portion of Cairn India’s stake was acquired by mining company Vedanta, but Cairn UK was not allowed to transfer its stake in the transaction. Indian tax officials said the company must first settle tax liabilities from the initial transfer of shares to its Indian subsidiary.
Cairn India has been asked to pay Rs 10,247 billion in retrospective taxes even though the company was fully acquired by Vedanta in 2011).
Cairn lost the case and in 2014 the tax authorities hit with an initial estimate of unpaid taxes of 10,247 billion rupees. However, with penalties added later, the amount exceeded Rs 24,500 billion.
In 2015, the tax authorities confiscated Cairn Energy’s remaining approximately 10 percent stake in Cairn India, which was valued at around $ 1 billion at the time.
During the arbitration, the government also seized a total of Rs.1,140 billion dividends from its minority stake in Cairn India (now part of Vedanta Ltd) and set off a tax refund of Rs.1,590 billion on the claim.
This prompted both Cairn Energy Plc and Vodafone Group Plc to turn to the Permanent Court of Arbitration in The Hague, the Netherlands. Both companies had believed India’s tax claims were wrong and alleged a breach of trade obligations.
In both cases, the verdict was in favor of Vodafone and Cairn Energy. While there were no major damages or refunds in the case of Vodafone, the government has been asked to award Cairn Energy $ 1.4 billion in damages.
When India refused to recognize the arbitration tribunal’s judgment, Cairn moved many courts around the world to seize Indian assets. She recently seized some Indian assets in Paris after receiving an order from a French court.
URGENTLY NEEDED COURSE CORRECTION
While the government had previously stated that it has challenged the ruling on its claim in the Cairn Energy and Vodafone Group proceedings, it now appears to have decided on a much-needed course correction.
Economists and experts welcome the abolition of the controversial law, as it would give foreign investors confidence. Speaking to BBC News, Bijal Ajinkya, partner at law firm Khaitan & Co, said it was one of the “boldest” moves in the history of Indian tax law.
While the government has billions of dollars to pay off debts, the fact that it has made course adjustments to improve its image as an investment location will be of use in the future.
The 2021 tax law (amendment) bill was tabled by the Union’s Ministry of Finance on Thursday. It offered to ditch retrospective tax claims against corporations – on deals prior to March 2012 that involve the indirect transfer of Indian assets – if certain conditions, such as the withdrawal of pending litigation and the assurance that no damage claims will be made, are met.
The government has told parliament that at least 17 companies will benefit from the move, including Cairn Energy Plc and telecommunications giant Vodafone.