India scraps retrospective tax provisions with an aim to bolster investor sentiments

Author – Sourabh Baser, Partner BGJC & Associates  LLP

Couple of adverse decisions by international arbitration tribunals had got the Indian Government on back foot in front of global business community. But never too late, the move of Government to scrap the controversial provisions related to retrospective taxation of indirect asset transfers is bold and pragmatic. The current government which came to power in 2014 has been consistently opposing the move of retrospective amendments in taxation law. However, from the backdoors it constantly pursued a skirmish approach before the arbitral tribunals. The back-to-back setbacks from the arbitral tribunal in case of Vodafone Plc and Cairn Energy Plc has forced the government to take a step back and for good.

On August 9, a bill was passed in Parliament by the lawmakers to amend the provisions of Income Tax Act, 1961. The said bill proposes to amend the tax statute to provide that no tax demand shall be raised in future based on retrospective amendment for indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012. Important to note that the Finance Act, 2012 provided a validation of tax demand for cases relating to indirect transfer of Indian assets on retrospective basis. The move of Government in 2012 was to nullify the Supreme Court ruling in case of Vodafone.

The statement of objects and reasons of the bill passed on August 9 provides that amendments in 2012 invited criticism from the investor community specifically with respect to the retrospective applicability of tax provisions. It further states that:

“Such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination. 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”

The statement further highlights the importance of foreign investments in India for economic recovery after the pandemic to ensure economic growth and better employment opportunities.

The current government has taken almost seven years to reverse the retrograde provisions after terming it as an act of “Tax Terrorism” while sitting out of power. Indian government’s current move is being referred as a strategic move to attract the foreign investors community. However, there is no doubt that this move is in response to the arbitration order in case of Carin Energy Plc, wherein the latter secured an order to freeze Indian assets at more than 60 locations across the globe. The arbitral tribunal has asked India to pay Cairn an award of more than USD 1200 million along with interest and legal costs.

There were 17 cases in total including Cairn and Vodafone’s case. Out of the 17 cases, in 4 cases a part of tax demand was paid by the litigants including Cairn and Vodafone. The government will now refund the tax amount paid in those 4 cases to the tune of USD 1.075 billion. The current amendment in statute providing for refund of tax already collected to the taxpayers comes with certain conditions. The key conditions attached to the amendment includes:

  1. Withdrawal or furnishing of undertaking for the withdrawal of pending litigation;
  2. Furnishing an undertaking that no claim for cost, damages, interest etc. shall be filed.

Attaching the conditions to amendment in tax statute will ensure that the issue stands resolved once and for all. Accordingly, as per the media reports Vodafone is planning to settle the issue with the government to end the decade old tax dispute.

There is no doubt that this move of the government will provide breather to foreign investors looking for fresh investment in India to a significant extent. This will also help the government to push for an investor friendly environment with reasonable certainty about the taxation laws. The bold move to boost investor sentiment along with the earlier slashing of corporate tax rates will develop an interest of global community which is looking towards India as a next destination of­ superlative economic growth.

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Contributing Advisors