Lok Sabha passes Bill, retrospective tax law on its way out

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August 07, 2021 5:16 AM

Jaitley had said in the House that the law could not be amended at that time as the matter was sub judice, Sitharaman recalled. The government was not in a position to make legislative changes as the legal processes were to be concluded, she said.

In the case of Cairn Energy, the The Permanent Court of Justice at The Hague had asked the Indian government to return the value of the shares it had seized and sold, tax refund withheld and dividend confiscated to enforce the retrospective tax demand.In the case of Cairn Energy, the The Permanent Court of Justice at The Hague had asked the Indian government to return the value of the shares it had seized and sold, tax refund withheld and dividend confiscated to enforce the retrospective tax demand.

The Lok Sabha on Friday passed ‘The Taxation Laws (Amendment) Bill, 2021’ that seeks to amend the Income Tax Act to effectively withdraw tax demands made by India on 17 firms including Vodafone and Cairn Energy, on the capital gains from deals prior to May 28, 2012. These demands were made on the premise that the deal values were impacted by substantial underlying Indian assets.

Finance Minister described the 2012 legislation, which is virtually being invalidated with the clarificatory amendment, as both ‘bad in law’ and ‘bad for the investors’ sentiments. She said the government’s move was towards fulfilment of the promise made by the ruling BJP, prime minister Narendra Modi and former finance minister Arun Jaitley as early as in 2014, that the controversial piece of legislation introduced by the UPA-II government in 2012 would be reviewed, as “we don’t believe in retrospective taxes.”

While the move is hailed by taxpayers and tax experts as bold and pragmatic, the fact remains that the NDA government has hitherto been seen pursuing these tax cases aggressively; it even raised Rs 7,900 crore from Cairn by seizing and selling the UK-based energy company’s stake in its erstwhile India unit, confiscating dividends and withholding refunds. This apparently reflected an ambivalence if not a reversal of the policy articulated by the government. Of course, the amounts collected under retrospective tax claims – about Rs 8,100 crore – will now be refunded sans interest.

Jaitley had said in the House that the law could not be amended at that time as the matter was sub judice, Sitharaman recalled. The government was not in a position to make legislative changes as the legal processes were to be concluded, she said.

Both Vodafone and Cairn secured arbitration orders in their favour in September and December 2020, respectively. Sitharaman said once the two lawsuits were settled, the government had started consultations with various stakeholders, including the law ministry. “Now, we have come up with this Bill at the next available opportunity,” she said.

Finance secretary TV Somanathan said on Thursday: “We are consistent with earlier position — we have the sovereign right to tax and we preserve that right. Still we don’t accept that the sovereign right of Parliament is being arbitrated in foreign courts. But we won’t enforce tax demands based on retrospective change and amount collected would be refunded without interest”.

In the case of Cairn Energy, the The Permanent Court of Justice at The Hague had asked the Indian government to return the value of the shares it had seized and sold, tax refund withheld and dividend confiscated to enforce the retrospective tax demand.

With the government refusing to honour the award, the firm moved court in the US to seize assets of Air India. It also got an order from a French court to freeze 20 Indian properties in Paris to recover $1.2 billion-plus interest and penalties. The move clubbed India with nations such as Pakistan and Venezuela that have faced similar actions by entities seeking enforcement of awards.

According to the Bill passed by the Lower House, the retrospective provisions aren’t to be technically withdrawn but their application would be curtailed subject to riders like withdrawal of the litigation, including those under arbitration and bilateral investment treaties by the taxpayers concerned. Also, it is being legislatively sanctioned that no tax demand will be raised in future on the basis of the 2012 retrospective amendment for any indirect transfer of Indian assets. Of course, the capital gains tax on indirect transfer will continue to apply for all transactions post the 2012 amendment.

Using that retrospective tax law, India in January 2013 slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest. This was in February 2016 updated to Rs 22,100 crore plus interest. The country also slapped an assessment of `10,247 crore on Cairn Energy in January 2014, which after including penalities came to Rs 20,495 crore.

(With PTI inputs)

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