In a big-bang move that will potentially cheer the global investor community, the government has decided to withdraw the controversial retrospective tax laws on indirect transfer of assets. A bill to this effect that makes tax laws prospective (applicable in the future rather than backdated) was introduced in in the Lok Sabha on August 5.
The unpopular tax policy, which was first introduced in Budget 2012, had dampened the investment climate and triggered a rash of domestic and international litigation and arbitration involving MNCs like Vodafone and Cairn, in some cases involving legal setbacks for the government.
"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," Finance Minister Nirmala Sitharaman said in a written statement along with the bill.
"It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation," Sitharaman said.
WHAT LED TO THE RETRO TAX POLICY?
A retrospective tax bill of Rs 40,000 crores which includes alleged tax liabilities, penalties and interest, was claimed by the Indian revenue authorities over Vodafone’s acquisition of the Indian assets of Hutch in 2007. It is widely considered as one of the most controversial global tax disputes over a cross-border deal.
In 2012, following heated litigation at lower courts, the Supreme Court ruled that the tax department had no jurisdiction to impose obligations on Vodafone for a transfer of shares of a foreign company between two non-residents. Then came the sudden twist which shook up the global tax community.
As part of the Budget for the same year which was announced by Finance Minister Pranab Mukherjee, the Indian Parliament went ahead and introduced retrospective amendments to the Income Tax Act, which neutralised the top court’s decision. The amendment impacted not only Vodafone but other entities as well involved in similar cross-border transactions.
Here are a few reactions from a cross-section of tax experts on the impact of the reversal in the government’s tax policy -
1) “Welcome development- a clear signal from India to the global investor that India’s 2012 experiment with retrospective tax legislation around indirect investments into downstream assets in India is now conclusively at an end. It augurs well for a new era of tax certainty.” –Fereshte Sethna, Vodafone Lawyer & Senior Partner, DMD & Associates
2) “This is indeed a very progressive step, undoing something which has been a sore point for investors but has not yielded anything to the government”
- Dinesh Kanabar, CEO, Dhruva Advisors
3) “ Restores a lot of confidence in the investor fraternity and should definitely help clear up a lot of clogged revenue & litigation cases, thereby sending positive signals to the business world.” –Rajeshree Sabnavis, Founder, Rajeshree Sabnavis & Associates
4) “This amendment has been long overdue and is a welcome step for resolving historical baggage that has hampered India's investment image. While it is good to see the government take this step, the question remains whether investors who have obtained an award that comprises of interest component will take up the offer. It is important to note that the proposed amendment does not contemplate interest in respect of any taxes collected pursuant to the retrospective amendment. Nonetheless this step by itself makes a departure from a myopic approach that had been adopted till date.” – Rajesh Simhan, Partner , Anagram Partners 5)
“This is a big development and will surely put a lot of uncertainty to rest. However it shouldn’t have taken 9 years. Even though India has been dragging its feet all these years, it does not come as a surprise since India suffered a series of setbacks in international arbitration on this issue. Interestingly the government will not pay any interest on refund dues and other costs which could possibly be steep in some high-profile cases. One has to see how would the taxpayers view this. Overall, this will certainly boost the confidence of taxpayers and help India to continue to attract record amounts of FDI” – Amit Maheshwari, Partner, AKM Global