Exclusive | How the govt set about burying retrospective tax in complete secrecy

That all this was done in complete secrecy and without any inkling by the hundreds of reporters covering PMO, Finance Ministry, Law Ministry, Cabinet and Parliament, is something officials are rather pleased about.

They are also pleased about the fact that in their extensive, informal discussions with Cairn Energy, Vodafone and other companies, no one let out that the government was willing to put retrospective tax on ice.

The bill was cleared in Lok Sabha on August 6. It will now go to Rajya Sabha, but since it is a Money Bill, the Upper House’s assent is not a necessity. Once the president signs off on the bill and it is notified through a gazette, the retrospective tax will be consigned to history.

‘Political will was clear’

“A move like this cannot be made without the complete backing of the political leadership. And the will was clear that retrospective tax had to go,” said an official involved in the process.

Discussions had been going on within the government since the judgement by the Permanent Court of Arbitration at The Hague, in December 2020, that asked India to return $1.2 billion to Cairn, plus an interest of $500 million.

These internal talks were not regular, however, as the focus had shifted to the 2021-22 Union Budget. It was decided quite early on that any legislative move would be made in the Monsoon Session of Parliament as the Finance Ministry’s bandwidth would be taken up by the passage of the Finance Bill, and Parliamentary discussions on budget, in the Budget Session.

Meanwhile, in February, senior Cairn Energy executives had started informal discussions with the government on resolving the tax dispute. In May, Cairn sued Air India in the US District Court for the Southern District of New York, to ratchet up pressure on the Indian government to pay the sum of $1.2 billion plus interest and costs.

On July 8, Cairn secured permission from a French Court to secure Indian sovereign assets in Paris. As all this was unfolding, the Finance Ministry’s official stance was that it was open to an “amicable solution”, and that it would take legal remedies to protect India’s interests.

Officials insist that the decision to repeal retrospective tax was not because of any pressure from Cairn’s legal tactics.

“The former finance minister late Arun Jaitley had said that while the government was not in favour of retrospective tax and that it was a legacy issue, the Centre would wait for a logical conclusion of the judicial and arbitration process. As far as we are concerned, that arbitration process reached its conclusion last December. It was after that that we began planning the amendments to the Income Tax act,” said a second official.

Drafting the bill

While the PMO and the Prime Minister himself were aware of the work being done in the Finance Ministry to find a solution to the imbroglio, it was at the July 21 meeting that Revenue Secretary Bajaj and other Finance Ministry officials gave a detailed presentation to the PM.

They discussed at length the history of the tax from 2012, the amounts sought by the Centre from Cairn, Vodafone and other companies, action taken so far, the legal wrangling, and whether it was all worth it when compared to the beating India’s reputation as an investment-friendly destination had taken.

The Centre had demanded Rs 22,100 crore from Vodafone included retrospective tax, back taxes, penalties and interest and was seeking upwards of Rs 30,700 crore from Cairn in penalties for its alleged failure to pay Rs 10,247 crore capital gains tax on time.

Once Modi gave his go-ahead, a select group of officers set to work on drafting the bill. In fact, as per sources, only 7-8 people in the Finance Ministry knew of the work being done. These included Sitharaman, Bajaj, Somanathan, Central Board of Direct Taxes Chairman JB Mohapatra, and a few others.

One might think that there was resistance to the move by Indian Revenue Service officials, the so-called taxmen. However, sources say that the CBDT was on board and supportive of the move from the beginning.

Given the short timeframe, work on drafting the bill proceeded at a brisk pace. In fact, work was still being done on it till the morning of August 5. The previous day cabinet had given its approval. So the day after that only was the process finished, the Lok Sabha Secretariat was informed, and the bill went for printing.

On the afternoon of August 5, ‘a supplementary list of business’ was put on the Lok Sabha website, saying that a previously unannounced legislative bill would be introduced. At 5 PM, Finance Minister Nirmala Sitharaman tabled the bill. That was when the wider world came to know.

Post-Script: The Mukherjee factor

One of the officials who Moneycontrol spoke to gave an interesting insight as to why the Modi government did not make this move earlier, in its first term. “Apart from the fact that cases were ongoing, there was also the issue of the late Pranab Mukherjee being president,” said a third official.

“Decorum had to be maintained. It would not have been proper that the president give his assent to a bill which proposes to withdraw the very retrospective tax laws he had introduced as the finance minister,” the person said.

Mukherjee, well-liked and admired by Prime Minister Modi, was the finance minister from 2009 to 2012. In July 2012, he became the 13^th President of India, a post he held till July 2017.