Finance Minister Nirmala Sitharaman introduces bill on tax laws (amendment) in Lok Sabha. in front
The government on Thursday took the first step to abolish the controversial retrospective tax law of 2012 that put huge tax claims on foreign investors like Vodafone and Cairn Energy and hurt India’s investment climate – less than a month later Cairn Energy ruled by a French court received an order to freeze India’s assets in Paris.
The Minister of Finance and Corporate Affairs, Nirmala Sitharaman, presented the draft tax law amendment to the Lok Sabha on Thursday to repeal the relevant retrospective tax clauses introduced in 2012 to prevent the indirect transfer of Indian assets into the field of taxation to deliver.
Under the proposed changes, any tax claims on transactions made prior to May 2012 will be eliminated and any taxes already collected will be refunded, but without interest. In order to be eligible, the taxpayers concerned would have to drop all pending lawsuits against the government and promise not to file any claims for damages or costs.
Former Treasury Secretary Pranab Mukherjee introduced retrospective tax powers after the Supreme Court ruled that Vodafone did not accept a transaction in 2007 that involved the purchase of a 67 percent stake in Hutchison Whampoa for $ 11 billion could be taxed. The tax was later brought against Cairn Energy for a corporate reorganization carried out in 2006-07 and its assets were frozen by the authorities.
The then-opposed National Democratic Alliance (NDA) called this “tax terrorism” and the late former Treasury Secretary Arun Jaitley promised to stop retroactive tax collection. In the NDA’s seven years in office, however, there has been no move to abolish the law – the latest rethinking may have been triggered by the Paris court order last month that allowed Cairn Energy to sell at least 20 Indian properties valued at US $ 23 million Freeze Dollars.
The Bill’s Statement of Objects and Reasons states: “It is argued that such retrospective changes are against the principle of tax security and damage India’s reputation as an attractive travel destination.” and infrastructure sector initiated extensive reforms that have created a positive environment for investment in the country. However, this subsequent clarification and the resulting demand in some cases is still a sore point for potential investors. “
Experts welcomed the move as it will end the specter of political uncertainty for potential investors who have seen the Vodafone and Cairn cases over the past decade.
“This could help restore India’s reputation as a fair and predictable regime, in addition to ending unnecessary, lengthy and expensive litigation,” said Pranav Sayta, EY tax partner.
“The specter of the retrospective change to indirect transfers is now to be buried with the government abandoning tax claims on such covered indirect transfers of Indian assets and trying to respect the original Supreme Court decision,” noted Aravind Srivatsan, tax director at Nangia Andersen.
Separate judgments by international arbitration tribunals in the Vodafone and Cairn cases ruled against India’s retroactive tax claims last year. While the government had previously announced that it would comply with the judicial process, it has appealed both rulings.
Cairn Energy, awarded $ 1.2 billion by an international tribunal, has filed lawsuits in at least ten global jurisdictions including the US, UK, Canada and Japan to confiscate India’s assets in lieu of the arbitration award as the Government does not adhere to the decision of the arbitral tribunal.
After Cairn filed a lawsuit against Air India in a US court in May this year to hold the national carrier liable for payment of the damages awarded, the Treasury Department said it was “vigorously” defending its case against the international arbitration order, alleging that India has never agreed to settle a national tax dispute.
Simon Thomson, CEO of Cairn Energy, who called on the government to resolve the tax dispute and pledged to invest more in India if resolved, has said in recent months that the company will examine all options to serve the interests of its international shareholders, including institutional investors. It remains to be seen whether investors are ready to let go of the damage attributed to Cairn along with interest on the controversial tax levy, as suggested by the government in the amendments launched on Thursday.
The question of the retroactive tax, which the British government has repeatedly raised in bilateral meetings with India for years, is likely to have been taken up again in recent talks during Foreign Secretary Harsh Vardhan Shringla’s visit to the UK at the end of July.
Deloitte India partner Rohinton Sidhwa said the changes could end arbitration proceedings from the past “that have embarrassed India in international circles,” while most observers complained that the issue was lingering too long.