The central government finally found it in their hearts to bury the retroactive tax law. On Thursday, amendments to the 1961 Income Tax Act were introduced in the Lok Sabha to withdraw all retrospective tax claims made under the law at issue and provide interest-free refunds against them.
The move comes when Cairn Energy threatens to seize Indian assets overseas after an international arbitration court ruled in its favor. The tribunal had overturned India’s retrospective tax claim and ordered the return of shares sold, the collection of dividends and withheld tax refunds to collect the claim.
There is also Vodafone’s retrospective tax case where the arbitration tribunal ruled against India. India is not liable in this case, but still has to pay Cairn US $ 1.2 billion.
“This is a very pragmatic move by the government indeed and should help contain the widespread litigation in similar cases such as Vodafone and Cairn. A worthy fight to lose, ”said Kumarmanglam Vijay, partner, J Sagar Associates.
Here’s a look at what retroactive tax law was and what happens after it ends:
- In 2012, the Indian government retrospectively amended the Income Tax Act to justify the retroactive tax claim against Vodafone for the purchase of Hutchison Telecommunication’s stake in Hutchison Essar.
- The amendment made Section 9 (1) (i) of the Income-Tax Act retrospectively applicable to recover tax claims on income from or derived from the transfer of an asset or capital property located in India as a result of the transfer of an interest or interest in one registered or registered outside of India Company or legal entity.
- In 2014, the government again made use of the 2012 amendment to increase the tax claim against Cairn Energy for an internal company restructuring carried out in 2006.
- With the repeal of the retroactive tax law, the government has declared that any tax assessment, revaluation or order under this rule will be made before May 28, 2012, the date it came into effect.
- Subsequent tax claims that were made before May 28, 2012 expire if certain conditions are met, such as resignation or declaration of withdrawal of a pending legal dispute and submission of a declaration that no claim for costs, damages, interest, etc. will be filed.
- If the taxpayers have paid the tax claims against them according to the retroactive tax law, this amount will be refunded to them, but no interest will be paid on this amount according to § 244A.
- In 17 cases, income tax claims were made under retroactive tax law. In two cases, judgments are pending on a suspension granted by the High Court.
- Arbitration proceedings under the bilateral investment protection agreement with the United Kingdom and the Netherlands had been commenced in four cases, of which India had lost two – against Cairn Energy and Vodafone. The government is not liable to Vodafone, but still has to pay Cairn $ 1.2 billion as an arbitration award.
- The retroactive tax law scared investors nine years ago and is still a sore spot for potential investors, the government admitted.
- The center expects the repeal of the retrospective law would spur foreign investment into India, a much-needed development as the country seeks to reverse the effects of the Covid-19 pandemic.
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