Revocation of Retroactive Taxes as Reduction – The New Indian Specific

The draft law on tax laws (amendment) 2021 was recently passed by parliament. It aims to amend the provisions of the Income Tax Act 1961 and the Finance Act 2012. Provisions have been made on the above change to abolish the retrospective application of taxation rules to any income that might result from the transfer of shares or interests in a foreign company where the asset or capital value is essentially located in India .

In 2012, Vodafone International Holdings BV filed a lawsuit against the Union of India for levying a retrospective tax on the acquisition of shares (nearly 67%) in Hutchison Essar Limited. The Supreme Court ruled in Vodafone’s favor, stating that this is specifically foreseen if such indirect transfers are to come under tax legislation. For example, in section 64, when calculating an individual’s total income, it is clear that it includes both an individual’s direct and indirect income. In Section 9, which deals with the above situations and is also the subject of the current amendment, there was no explicit provision for cases of indirect transfers. It also decided that transmission could not be covered in the named case as it did not pass the resident test and the source test.

Following the decision of the Supreme Court in favor of Vodafone, in May 2012 the legislature passed the amendment to the regulations of Section 9, which was then referred to as a “clarifying change”, and aimed at including the taxation of profits from such indirect transfers retrospectively.

To this day, this was the law and was frowned upon by many. This retrospective change has not only had a negative domestic impact, but has also led India to breach its international treaty obligations. As a result, it has also led to successive legal disputes outside India in which the government has been indicted as a defendant. In September last year, Vodafone won the arbitration award against the government under the bilateral investment agreement between India and the Netherlands. And under the UK-India bilateral investment treaty, Cairn Energy PLC initiated arbitration proceedings against the Indian government, the lawsuit essentially based on the illegality of retrospective legislation and violation of principles of international trade law such as treatment. The arbitration tribunal thus constituted was made in December 2020 in favor of Cairn Energy PLC in the amount of 1.2 billion.

The positive step towards the abolition of the unjustified provision was imminent after the award of the arbitration award in favor of Cairn. More than 10 companies would now benefit from this provision, with Cairn and Vodafone being the main stakeholders, and this would be a way out of the 17 ongoing cases against the government. The conditions attached to enforcement under the provisions of the new law are: The company would withdraw from any pending lawsuit against India or file a resignation and make another statement that the company would not have any cost, interest or damage. According to the new law, the amount already paid by the company under the old law will be reimbursed to you without taking the interest into account.

It is important to note that tax law is one of the measures used to assess the ease of doing business in a given country and that better performance in this index is one of the visions the new India is trying to achieve. This corrective action should be part of a wider range of actions the government should take to send a positive signal to overseas investors and avoid litigation about it. This step is a bit delayed, but it comes at an acceptable time. With India struggling to stabilize its economy due to Covid-19, foreign investment in this growing economy could put the country in a better position.

This is also evident from the communication of the objects and reasons mentioned in the draft law. All in all, the government has dealt with this precarious situation practically because unstable economic laws are not desirable in any national economy.

Kavya Lalchandani

Legal scholar from Delhi

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