Retrospective Taxation: A Chunk Of The Bitter Apple – UP Entrance Information

After years of procrastination, the center finally got rid of the infamous retroactive tax law introduced in 2012 by then Finance Minister Pranab Mukherjee. This law has been described as a major obstacle to doing business in India. Two recent orders from international arbitration tribunals against the Indian government in such cases – in relation to Vodafone Plc and Cairn Energy Plc – have fueled the outcry from the global investor community against the law and the embarrassment the government has faced as a result .

On August 9th, the Rajya Sabha approved the Taxation Laws (Amendment) Bill 2021. The decision to finally bite the bullet will help the Center Project India to be investor-friendly. This is crucial considering how badly the country is in need of foreign investment to get the economy back on its feet as it is grappling with low growth, low private investment and massive job losses as a result of the pandemic.

The retroactive tax law, introduced by an amendment to the Income Tax Act, was implemented after the Supreme Court in January 2012 in favor of Vodafone Plc in a case related to the acquisition of Hutchison’s Indian assets in 2007 through an intermediary. The government had filed a tax claim of US $ 2 billion (currently over Rs 14,600 billion) against the British telecommunications company. Following the ruling by the Supreme Court, the government changed the income tax law to allow mergers and acquisitions between foreign companies to be taxed on much of their assets in India.

While industrial groups are usually cautious about publicly criticizing government policies, many have appealed to the government to reconsider. Corporate lobby groups in the US voiced their concern to then Prime Minister Manmohan Singh, reportedly saying: “The sudden and unprecedented move (the retrospective tax amendment law) has undermined confidence in the Indian government’s foreign investment and tax policies and has undermined the rule of law questioned.”

Aside from scaring investors, the retrospective taxation resulted in several lawsuits against the Indian government being filed in international courts. In September 2020, a tribunal in The Hague ruled that India’s retroactive tax proposal on Vodafone violated an investment agreement between India and the Netherlands. Following a similar ruling, the British oil company Cairn Energy was granted the right to sell Indian assets in France worth over 20 million euros (approx

Rs 175 crore) this July. In another arbitration, Devas Multimedia, a satellite broadband company that has won a case against Antrix Corporation (a branch of the Indian space research organization), is claiming over $ 1.2 billion (approximately Rs.8,800 billion) for the she is in arbitration against the Government of India and is also attempting to seize Indian Government assets overseas. (While the Devas case does not involve retrospective taxes, it was an international embarrassment.)

After these cases, there was fierce speculation about how the center would react. In the Cairn case, the Ministry of Finance had promised “constructive talks” in order to find an “amicable solution to the dispute within the legal framework of the country”. The Modi government has dealt with issues relating to the withdrawal of the retrospective tax law and has given assurances that the law will not apply to future cases. This issue has been dealt with cautiously for a number of years. At a meeting in Washington DC in 2015, then Treasury Secretary Arun Jaitley said: “When it comes to retrospective taxation, I think India has had a very negative experience. If any government indulges in this mishap in the future, the cost will be high. ”On August 5, Union Finance Minister Nirmala Sitharaman reiterated the government’s commitment to facilitate business operations and said the center would propose that in these cases, refund the amount paid. The total refund amount is estimated at around 8,100 billion rupees.

S.Hankar Sharma of First Global, an international wealth management company, says India is a good place to find political democracy, but also in situations like the Vodafone case, where you find an economic dictatorship. “There is a huge difference between what happens on paper and what happens on the ground,” he says, adding that rules are often changed arbitrarily. The retroactive tax amendment law was an example of this. “The government should now [projecting] that it solved the problem to improve its image in terms of the simplicity of doing business, ”he adds. Another economist at a global investment bank says his phone hasn’t stopped ringing since the law-changing law was passed. “Investors want clarity about what will happen to the other cases,” he says. There are reportedly 15 other cases besides Cairn Energy and Vodafone that will be affected by the repeal of the retroactive tax law.

Some say it may have been Cairns’ militant decision to seize Indian government assets in France that forced the government to act. Whatever the reason, the Indian government has finally got rid of a law that has been rejected not only by MNCs but also by international courts. While the move may not result in an immediate surge in investment, those pursuing investments say it will work in the country’s favor if India enters into talks with companies about relocating Chinese supply chains to India.

While India improved its ranking in terms of ease of doing business between 2014 and 2019 – India was ranked 63rd overall in the World Bank’s 2020 Ease of Doing Business Ranking – it is lagging behind in terms of contract enforcement. In this category, it ranks 163rd out of 190 countries. It is crucial for the future that the spirit of this change in the law is put into practice. India must evolve from a country of political uncertainty into a country of opportunity.

This move is also an important development for the ailing telecommunications company Vodafone Idea. Sources say that while a rescue plan has been in the works for some time, implementing it sends a very positive message. On the day the law was passed, Vodafone Idea Ltd (VIL) shares closed at 7.10 rupees, recovering from the 24 percent decline the company’s board of directors suffered after accepting the resignation of Chairman Kumar Mangalam Birla . Analysts say the bill will benefit Vodafone Plc directly and that the parent company is likely to pour money into its insolvent Indian subsidiary. It could also attract private equity funding. According to TRAI (Telecom Regulatory Authority of India), VIL was 31st. The company’s debt has skyrocketed since March 2016 and is moving in a difficult market marked by a tariff war led by Reliance Jio, the dominant player with it a market share of 35 percent, was unleashed. VIL owes the government approximately $ 6.74 billion (Rs.49,876 billion) for the use of the ether and for license fees over the next 10 years.

With the repeal of the retroactive tax law, the center has sent the right signals to global investors. A series of steps must now be followed to make India a much more attractive destination for global players if it is to increase growth and employment.