The Union Finance Minister described the 2012 legislation as ''bad in law and bad for the investors' sentiments''. Rajendra Agrawal, who was in the chair, declared the bill passed after clause-wise discussions of the bill and a brief statement by Sitharaman.
A bill that aims to end all retrospective taxation imposed on indirect transfer of Indian assets was passed by the Lok Sabha on Friday amidst continuous protests by opposition over the alleged snooping through the Pegasus spyware and other issues. When the ‘The Taxation Laws (Amendment) Bill, 2021′ would be passed by Rajya Sabha too, all tax demands made on companies like Cairn Energy and Vodafone using a 2012 legislation on indirect transfer of Indian assets prior to May 28, 2012 will be withdrawn.
The Union Finance Minister described the 2012 legislation as ”bad in law and bad for the investors’ sentiments”. Rajendra Agrawal, who was in the chair, declared the bill passed after clause-wise discussions of the bill and a brief statement by Sitharaman.
The finance minister said there were 17 litigations due to the retrospective tax law and even the Supreme Court had said in 2012 that the tax could not be levied for the indirect transfer of shares of foreign companies. ”The bill has been brought as a clarification,” she said.
Sitharaman said in 2014, the then Finance Minister Arun Jaitley had made a commitment to set up a high powered committee to look into the provisions of the 2012 law as the NDA government did not believe in retrospective taxes. Jaitley had said that the present government did not believe in retrospective taxes but the law could not be amended at that time as there were court cases, she said.
The finance minister said once the lawsuits were settled in September and December 2020, 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. We are fulfilling the words given in this august house by former finance minister Jaitley and the government under the leadership of Prime Minister Narendra Modi brought the bill,” she said.
“It is also proposed to refund the amount paid in these cases without any interest thereon,” the bill said. The refund could be around Rs 8,100 crore, which was collected by enforcing the 2012 law.
Besides creating uncertainly in minds of investors, the retrospective taxes have in recent months been overturned by international arbitration tribunals in two high profile cases — UK telecom giant Vodafone Group and oil producer Cairn Energy.
In the case of Cairn Energy, the tribunal 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, Cairn Energy Plc moved court in the US to seize assets of Air India. It got an order from a French court to freeze 20 Indian properties in Paris to recover USD 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.
Finance Secretary T V Somanathan had said a total of Rs 8,100 crore was collected using the retrospective tax legislation. Of this, Rs 7,900 crore was from Cairn Energy alone. This money will be repaid.
As much as Rs 1.10 lakh crore in back taxes was sought from 17 entities that were levied taxes using the 2012 legislation. Of these, major recoveries were made only from Cairn.
Rules will be framed under the law giving a reasonable timeframe for the companies to come and give an undertaking to the government that they will not pursue the cases. They will also have to give an undertaking that they agree to forego the interest on amounts collected.
The 2012 legislation, commonly referred to as the retrospective tax law, was enacted after the Supreme Court in January that year rejected proceedings brought by tax authorities against Vodafone International Holdings BV for its failure to deduct withholding tax from USD 11.1 billion paid to Hutchison Telecommunications in 2007 for buying out its 67 per cent stake in a wholly-owned Cayman Island incorporated subsidiary that indirectly held interests in Vodafone India Ltd.
The Finance Act 2012, which amended various provisions of the Income Tax Act, 1961 with retrospective effect, contained provisions intended to tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as Vodafone’s transaction with Hutchison in 2007 or the internal reorganisation of the India business that Cairn Energy did in 2006-07 before listing it on local bourses.
Using that law, tax authorities 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. They slapped an assessment of Rs 10,247 crore on Cairn Energy in January 2014, which after including penalities came to Rs 20,495 crore.
A similar demand was also slapped on Vedanta Ltd, which bought Cairn’s India business in 2011. Both Cairn and Vodafone challenged the demand under bilateral investment treaties India has with UK and the Netherlands, and they both got favourable rulings recently. Vedanta, from whom no tax recovery was made, too initiated arbitration to challenge the tax demand under the India-UK treaty. That arbitration award has not come yet.
The bill stated that income-tax demand had been raised in 17 cases and the retro tax was criticised for being against the principle of tax certainty and damaged India’s reputation as an attractive destination. It was a sore point for potential investors. “The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President),” it said. It further proposed that the tax on indirect transfer of Indian assets made before May 28, 2012, shall be nullified on furnishing of undertaking for withdrawal of pending litigation.