Finance Minister Nirmala Sitharaman introduces Taxation Laws (Amendment) Bill in the Lok Sabha
The government on Thursday took the first step towards doing away with the contentious retrospective tax law of 2012, which was used to raise large tax demands on foreign investors like Vodafone and Cairn Energy, and blamed for vitiating India’s investment climate — less than a month after Cairn Energy secured an order from a French court to freeze India’s assets in Paris.
Finance and Corporate Affairs Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill in the Lok Sabha on Thursday to nullify the relevant retrospective tax clauses that were introduced in 2012 to bring past indirect transfer of Indian assets under the ambit of taxation.
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 and promise not to make any demands for damages or costs.
Former Finance Minister, the late Pranab Mukherjee, had introduced the retrospective taxation power after the Supreme Court had held that Vodafone couldn’t be taxed for a 2007 transaction involving its purchase of a 67% stake in Hutchison Whampoa for $11 billion. Later, the tax was invoked against Cairn Energy for a corporate reorganisation done in 2006-07 and its assets were frozen by the authorities.
The National Democratic Alliance (NDA), which was in the Opposition at the time, had termed this “tax terrorism” and late former Finance Minister Arun Jaitley had promised to stop the retrospective tax levy. However, there has been no move to scrap the law in the NDA’s seven years in office so far — the latest rethink could have been prompted by last month’s Paris court order allowing Cairn Energy to freeze at least 20 Indian properties worth $23 million.
The Bill’s ‘Statement of Objects and Reasons’ reads: “It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination.” It also says, “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.”
Experts welcomed the move as it will end the spectre of policy uncertainty for potential investors who have seen the Vodafone and Cairn cases unfold over the past decade.
“This could help restore India’s reputation as a fair and predictable regime apart from helping put an end to unnecessary, prolonged and expensive litigation,” said Pranav Sayta, tax partner at EY.
“The ghost of the retrospective amendment on indirect transfers is now proposed to be buried with the government giving up claims on taxes due under such covered indirect transfers of Indian assets and is seeking to respect the original decision of the Supreme Court,” noted Aravind Srivatsan, tax leader at Nangia Andersen.
Separate international arbitration tribunal verdicts in the Vodafone and Cairn cases have ruled against India’s retrospective tax demands over the past year. While the government had earlier said it will honour the legal process, it has filed appeals against both the verdicts.
Cairn Energy, which was awarded $1.2 billion by an international tribunal has filed cases in at least ten global jurisdictions, including the U.S., the U.K., Canada and Japan to seize India’s assets in lieu of the award as the government didn’t abide by the tribunal’s decision.
After Cairn filed a lawsuit in a U.S. court against Air India this May, seeking to make the national carrier liable to pay the damages awarded to it, the Finance Ministry said it is “vigorously defending” its case against the international arbitration order and asserted that India had never “agreed to arbitrate” a national tax dispute.
Cairn Energy CEO Simon Thomson, who has been urging the government to put the tax dispute behind and promised to invest more in India in the event of a resolution, has asserted in recent months that the company will look at all options to protect the interests of its international shareholders, including institutional investors. It remains to be seen whether investors are amenable to letting go of the damages awarded to Cairn along with interest on the disputed tax levy, as proposed by the government in the amendments initiated on Thursday.
The retrospective tax issue, raised repeatedly by the U.K. government in bilateral meetings with India for years, is likely to have been reiterated again in recent talks during Foreign Secretary Harsh Vardhan Shringla’s visit to the U.K. towards the end of July.
Deloitte India partner Rohinton Sidhwa said the amendments may put an end to arbitration cases from the past “which have created great embarrassment for India in international circles”, while most observers lamented that the issue had been allowed to linger for far too long.