The Union Finance Minister recently introduced the Taxation Laws (Amendment) Bill in the Lok Sabha.
A key provision was doing away with the contentious retrospective tax law of 2012.
What is a retrospective tax?
A retrospective tax taxes a transaction that took place prior to the law being framed.
It can be a new or additional charge on transactions done in the past.
Countries use this form of taxation to rectify any deviations in the taxation policies.
Retrospective tax affects companies that had unknowingly or knowingly used the tax rules differently.
What is India’s retrospective tax law of 2012?
The retrospective tax provision was introduced in 2012 as an amendment to the Income Tax Act, 1961.
It allowed the government to tax companies on mergers and acquisitions (M&As) that happened before 2012.
In effect, it aimed to bring past indirect transfer of Indian assets under the ambit of taxation.
The law was thus used to raise large tax demands on foreign investors like Vodafone and Cairn Energy.
It was hence blamed for impairing India’s investment climate.
What are the two major cases in this regard?
UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion.
To this transaction, the Indian government raised a demand of Rs 7,990 crore in capital gain.
It said the company should have deducted the tax at source before making a payment to Hutchison.
The company took the matter to the Supreme Court.
The Court ruled in favour of Vodafone saying that it could not be taxed retrospectively.
To overcome the legal hurdle, the retrospective taxation law was introduced.
With this, the I-T department slapped Rs 3,100 crore tax notice on Vodafone India.
Anothersuchmove was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.
Both Cairn and Vodafone filed lawsuits in international courts against India’s retrospective tax.
Separate international arbitration tribunal verdicts in the Vodafone and Cairn cases have ruled against India’s retrospective tax demands.
The tax amendment now has been prompted by Cairn Energy’s relentless pursuit to enforce the arbitration award.
What are the current changes?
The Taxation Laws (Amendment) Bill nullifies the relevant retrospective tax clauses introduced in 2012.
As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped.
And any taxes already collected shall be repaid, albeit without interest.
To be eligible, the concerned taxpayers would have to drop all pending cases against the government.
They should also promise not to make any demands for damages or costs.
Going ahead, India needs to demonstrate greater clarity and consistency in policy across the board (trade tariffs, GST, etc.,) to fix its broken credibility.
