Following Precedents

Two years ago, an oil spill in an offshore field of oil major British Petroleum (BP) triggered a much-debated retrospective tax amendment in the US. A move similar to what India's finance minister Pranab Mukherjee announced in the Union Budget recently.

The reason for the US tax amendment was simple. BP, in order to reduce its tax liability, had earmarked huge expenses ($32 billion) towards oil spill-related clean-up exercises. This was permitted under US law but it would have cost the US $10 billion (Rs 53,700 crore) in tax revenue. "The Closing Oil Spill Tax Loopholes Act, 2010 retrospectively denied deduction for payment made for any claim for damages (or payment made in settlement of such a claim)," explains Manoj Kumar, managing partner of corporate law advisory firm Hammurabi & Solomon.

The US move had been a matter of debate in that country. An even more vigorous debate followed Lok Sabha's approval of a retrospective amendment to the Indian Income Tax Act, 1961, allowing the government to tax overseas deals involving domestic assets. Telecom major Vodafone was seen to be the immediate target of this amendment. The company had just secured a favourable Supreme Court Order in a tax dispute involving a capital gains tax demand of Rs 11,000 crore against the central government. The retrospective amendment was seen as a move to nullify this and to make Vodafone pay the capital gains tax related to its acquisition of Hutchison's stake in Hutchison-Essar for $11.2 billion (Rs 60,000 crore) in 2007. Since the entire transaction had happened in the Cayman Islands, the government had lost its due share of revenue.

Taking into account the tax demand, penalty and the interest, the amount sought by the government from Vodafone was Rs 20,300 crore, almost double the original demand. Global precedents had strengthened the government's resolve to legislate "retrospective tax amendments". It's not just the US; there are other examples too, including Australia, China and Britain. China introduced a general anti-avoidance law in 2008 to enforce anti-avoidance where a special purpose vehicle lacking any commercial or business purpose was set up.Britain has introduced retrospective tax amendments 11 times since 1945, the most recent one coming in April 2012.

International tax experts, however, feel that the similarity between the international cases and the Indian tax amendment is limited to its "retrospective" nature only. "These (retrospective amendments) are not commonplace. Typically, when you do this, you need to consider the context. The impact of such amendment on business should be explained to the industry and its views should be considered," says Rahul Garg, executive director at Pricewaterhouse-Coopers India.

According to Garg, the Indian amendment is unique because it was meant to override the ruling of the country's apex court. "A 22-year-old law was (retrospectively) amended in Britian, but that was because the law was not clear. How many retrospective amendments were carried out to reverse the judgement of the highest court of the country? In China it was not done for this purpose", he explains.

Mukherjee has, however, asserted that Parliament reserves the right to amend laws. "There cannot be a situation that somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin…because of making some arrangements through certain tax haven areas through a complicated setting up of a series of subsidiaries and having huge capital gains on the assets located in India," he said. Irrespective of Vodafone's protest, the government seems to be moving ahead with its plans.

(This story was published in Businessworld Issue Dated 28-05-2012)