India ends retroactive tax claims with new law amending tax law

India aims to end retrospective taxation of capital gains from sales of in-country assets by overseas registered companies. The development comes after major setbacks in arbitration proceedings with back tax claims, which were contested by Cairn Energy and Vodafone. The Indian government will also reimburse the monies received on the basis of post-taxation, but without interest, under certain conditions. An end to retroactive taxation has long been advocated by the international business community and will remove unnecessary uncertainty about creating corporate tax liabilities for a multinational in India. Previously, the 2012 Finance Act allowed the Indian tax authority to tax profits from the sale of shares in a foreign company – if those shares got their value from assets in India.

On August 5, 2021, the central government in the House of Commons tabled the Draft Tax Acts (Amendment) 2021, which aims to withdraw tax claims imposed by the Finance Act of 2012, which allowed retroactive taxes to be levied on indirect remittances of Indian assets . The bill is the result of longstanding tax disputes between India and the British companies Cairn Energy PLC and Vodafone Group.

The House of Commons approved the bill on Friday, August 6th. As soon as the bill gets the approval of the president, which is just a matter of procedure, the Indian government wants to settle the pending tax disputes. A senior Treasury official told the media: “Of the top four companies to be reimbursed, Cairn is the largest and is already in contact with the government. We will still inform them about the new law. We’ll talk to the other three as well. ”The other three cases involve New Singular Wireless (INR 1.19 billion / $ 16.03 million), WNS Capital (INR 470 million / $ 6.33 million), and Vodafone (INR 447.4 million / $ 6.03 million).

What is the tax amendment bill proposing and will there be retroactive tax opportunities in India in the future?

The Taxation Laws (Amendment) Bill, 2021, seeks to amend the Income-Tax Act of 1961 so that no retrospective tax claim is made on indirect transfers of Indian assets if the transaction is made before the 28th date on the 2012 Draft Finance received the approval of the President).

The bill stipulates that tax claims for indirect transfers of Indian assets deposited before 28 for costs, damages, interest etc.

The bill provides for the amount paid to be reimbursed without interest in these cases. In light of this intent, the Government of India is required to refund Cairn Energy $ 1.2 billion for the company’s shares sold, withheld tax refunds and dividends confiscated by the tax authorities.

The draft law also provides for the 2012 Finance Act to be amended so that the assertion of claims etc. in accordance with Section 119 of the 2012 Finance Act if certain conditions are met, such as an obligation that no claim for costs, damages, interest, etc. is asserted will.

In its objectives, the draft law states: “According to this, income tax claims were raised in 17 cases. In two cases, judgments are pending on a suspension granted by the High Court. In two cases the arbitral tribunal ruled in favor of the taxpayer and against the income tax office [referring to the Cairn Energy and Vodafone cases]. “

Why is the bill being introduced now?

The Taxation Laws (Amendment) Bill 2021 is an important step in ensuring the principle of tax security in India, which has long been demanded by foreign investors and multinationals operating in India.

In addition, Cairn Energy and Vodafone’s high-profile retrospective tax arbitration proceedings have done a lot of damage to India’s reputation as a business-friendly country by neutralizing the profits generated by bureaucratic reforms and the drive to expand Indian industrial production and infrastructure improvements.

India aims to resolve the pending cases by the end of the fiscal year.


On December 21, 2020, the Government of India lost international arbitration on the retrospective collection of taxes on Cairn Energy PLC. The three-person tribunal in The Hague, which includes an Indian representative, unanimously invalidated India’s claim of INR 102.47 billion in previous taxes over an internal reorganization of Cairn’s India operations from 2006 to 2007. In a 582-page decision, the Tribunal found that India, under its bilateral investment treaty with the United Kingdom, “has failed to fair and equitable treatment to the Claimants (Cairn Energy) investments”. The tribunal ordered India to return the value of stocks sold, confiscated dividends and withheld tax refunds to meet the tax claim. The government was also asked to indemnify Cairn “for the total damage suffered” as well as interest and arbitration costs. Based on that order, Cairn Energy has claimed that it has been awarded $ 1.2 billion in damages, plus interest and charges. According to sources, that would be $ 200 million in interest and $ 20 million in arbitration costs, with the total to be paid by the Indian government at $ 1.4 billion (approximately INR 105 billion).

Prior to the Cairn Energy award on September 25, 2020, Dutch Vodafone International BV won its international award against the Indian government’s back tax claim of INR 221 billion. The international arbitration tribunal ruled that the Indian government, which with retrospective legislation would raise $ 221bn. The Indian government’s liabilities – for legal prosecution costs – are significantly lower in this case as it has not taken any action to recover Vodafone’s back tax claim.

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