Retrospective Tax Law Amendment A Visionary Step

Back in 2012 when the UPA government was hit by a series of scams, including the infamous 2G spectrum allocation scam, the then Finance Minister Dr.Pranab Mukherjee retrospectively changed the I-T Act to tax transactions that involved the sales or transfer of shares taking place outside India but the underlying assets were located in India, hoping it would calm down criticism faced by the Manmohan Singh-led government. However, Mukherjee's decision to bring back this regressive practice which enabled imposition of retrospective tax on deals executed after 1962 meant many closed tax cases could theoretically be re-considered. In the time to come, this one decision became major embarrassment for successive governments as it drew flak from investor and taxpayer community.

Now 9 years later, the Narendra Modi government is abolishing this tax even as they had promised to do the same in 2014. Following the Cairn and Vodafone setbacks, Finance Minister Nirmala Sitharaman on August 5 introduced The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha and got presidential assent on Aug 13 ,2021, which seeks to withdraw tax demands made on indirect transfer of Indian assets prior to May 28, 2012. The Centre also proposed to refund the amount paid in these cases without any interest thereon. This important amendment is widely welcomed by the corporate world as it aims to restore India's reputation of a fair and predictable tax regime, promote India to become a favourable investment destination and help putting an end to unnecessary and expensive litigation. The government and corporates are said to have incurred hundreds of crores in these never-ending legal tussles. 

It is widely known that stable taxation policy plays a key role in inviting Foreign Direct Investment. While it is true that India has moved from a high tax country to a more moderate one, the retrospective tax demands did not represent a progressive tax environment here. Even though it was levied on only 17 entities, the tax significantly prevented many global companies to expand in India as they feared their investment was not adequately secured. In such a situation, the decision to withdraw the tax can certainly calm investors’ nerves, especially those who believe in India’s growth story. This amendment also comes at a time when the government is aggressively inviting global firms to open manufacturing centres in India and has taken multiple steps such as deducting corporate tax rate by 15% for manufacturing activity, PLI Scheme among other things. 

The other big advantage of abolishing the retrospective tax will be felt on India's image. In recent times, India's image took a big hit when energy explorer giant Cairn went ahead with seizing government of India's assets abroad and telecom giant Vodafone Idea giving strong signals of winding up its India operation. 

Indian government had slapped a tax demand of Rs 24,500 crore on Cairn when the UK-based company transferred shares of Cairn India Holdings to Cairn India. IT dept claimed that Cairn UK had made capital gains because of its business restructuring exercise. Cairn, refused to pay taxes, challenged and won India's stand at an arbitration court. Cairn was then awarded damages of more than $1.2 billion, plus interest and costs, in December last by the Permanent Court of Arbitration at The Hague. To reclaim its award, Cairn started identifying Indian government assets, including that of national carrier Air India, and received green signal from international tribunal to freeze them. 

Back in home, the biggest impact of this taxation system was felt in the telecom sector. Till last month, there were strong rumours that Vodafone Idea may cease its operations in the Indian market. 

Hit hard by India's top court verdict on adjusted gross revenue (AGR) among other things, Vodafone Idea's total debt had exceeded over Rs 1.8 lakh crore mark and its promoters refused to infuse any fresh equity in the company. What became very troublesome when business tycoon Kumar Mangalam Birla stepped down as non-executive chairman of Vodafone Idea (Vi) after offering to give up his stake in the company.

The government’s decision to discard retrospective taxation came as a breather for Vodafone. This cancels about Rs 22,000 crore of Vodafone Group Plc’s liabilities and may make it to rethink about its no-equity-infusion decision. In total 17 entities stand to benefit from this change in whom tax demand of Rs 1.10 lakh crore was made. So far, however, the total amount involved for all cases is about Rs 8,100 crore, of which about Rs 7,900 crore is related to the Cairn dispute. This is a small amount for the government to settle its dispute with two large European firms who have invested billions of dollars in India. 

The big question here remains whether the entities who have obtained an award that comprises of interest component will take up the offer. However, in case the dispute is resolved favourably and Cairn and Vodafone are willing to accept the proposed amendment and withdraw all litigations, it will show India as a matured market to do business.