Explained | Why did govt take U-turn on retro tax law and what does this mean for Vodafone, Cairn arbitration cases?

Finance Minister Nirmala Sitharaman on Thursday introduced The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha which seeks to withdraw the retrospective tax.

In other words, the Bill seeks to withdraw the tax liability on gains arising from indirect transfer of Indian assets prior to May 28, 2012.

"The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May, 2012," the government said.

The move will bring respite to companies like Cairn Energy and Vodafone, and is expected to to end their long-standing legal dispute with the Indian government. Both, Cairn and Vodafone have won international arbitrations against levy of retrospective taxes on them.

The Bill also proposes to refund the amount paid in these cases without any interest thereon provided that the companies don’t go into arbitration and withdraw litigation pending before any forum.

Moneycontrol explains the objective behind the amendments and what does the amendment mean for the Vodafone and Cairn Energy arbitration cases.

What is the objective behind the proposes amendment ?

Finance Minister Nirmala Sitharaman said that the amendments made by the Finance Act, 2012 to impose tax liability on gains arising from indirect transfer of Indian assets with retrospective effect have damaged India's reputation as an attractive destination.

"In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors," Sitharaman said.

Sitharaman further noted that after the COVID-19 pandemic, India is standing at a juncture where quick recovery of the economy is the need of the hour and stressed that foreign investments will play a critical role in promoting faster economic growth.

What does the amendment mean for the Vodafone and Cairn Energy arbitration cases?

The Indian government has been engaged in a long standing legal dispute with Cairn Energy Plc and Vodafone Group of UK over the retrospective tax imposed on them.

Last year in September, the Permanent Court of Arbitration at The Hague had ruled that India’s retrospective demand of Rs 22,100 crore as capital gains for a 2007 deal by the British telecom was “in breach of the guarantee of fair and equitable treatment” and asked the Centre to not pursue tax demands from Vodafone Group.

The then Finance Minister, the late Pranab Mukherjee, had proposed an amendment to the Finance Act in 2012, giving the Income Tax Department the power to retrospectively tax merger and acquisition deals retrospectively (that happened before that date).

Similarly, Cairn Energy, a Scottish firm which has oil and gas operations in India had challenged India's retrospective tax law in Hague over 2006-07 case relating to transfer shares when the Centre had billed Cairn Rs 10,247 crore plus interest and penalty.

Cairn, was awarded damages of more than $1.2 billion, plus interest and costs, in December by the Permanent Court of Arbitration at The Hague.

Last month it was reported that Cairn Energy has also secured an order from a French court authorising the freezing of 20 Indian government properties in Paris valued at over 20 million euros.

With a U-turn in the retrospective tax law, it is expected that it will pave the way for the companies to withdraw litigation in Indian and international courts and restore India's reputation as an attractive investment destination.