Does bill scrapping retro tax go far enough? Worries are the no interest clause, later I-T interpretation

Synopsis:

Delayed reset on retrospective tax is only the first step to regaining investor confidence

Introduction:

The government has recently introduced the Taxation Laws (Amendment) Bill, 2021, in Parliament. The bill seeks to nullify the contentious retrospective tax law by amending the Income Tax (IT) Act of 1961 and the Finance Act of 2012. 

Evolution of retrospective taxation in India:

• Earlier, the Supreme Court had ruled against the retrospective reading of the law by tax officials in the case of Vodafone. Despite that, In 2012, the Indian government then retrospectively amended the tax code, giving itself the power to go after mergers and acquisitions(M&A) deals all the way back to 1962 if the underlying asset was in India.
• The present government called the retrospective provisions a form of ‘tax terrorism’ and introduced a law to nullify them.

Issues with the 2012 amendment:

1. Immediately, several large transactions done by foreign companies prior to 2012 came into the tax officials net.
2. Foreign investors were naturally alarmed that the Indian government could go back in time and charge them for transactions legitimately done in the past.
3. The arbitration cases internationally led to large awards upwards of $1 billion against India, including interest and damages.
4. Further, the winning parties started enforcing their award in foreign courts and dented India’s image internationally.

Challenges with the Bill:

• The Bill allows for the refund only of the principal amount in these cases, not the interest. But the Bill is silent on what if the companies are not ready to accept the payments without interest.
• Since the bill does not provide for the payment of any interest, the companies might prefer the arbitration and litigation proceedings where they are likely to get the refund with interest at the market rate.
• Similarly, the government’s stand is also not mentioned in the bill, if the companies are not withdrawing the cases within India and abroad.
• Large entities like Cairn Energy Plc, Vodafone, etc have already received large arbitration awards in their favour. So, they might not give up the demands for the lower amount provided by the government.
• The bill also provides that apart from these conditions, further conditions may also be stipulated by CBDT. In the past, the CBDT and IT departments prefer to put stringent conditions.

Conclusion

India needs to demonstrate greater clarity and consistency in policy across the board to fix its broken credibility.

The government should allow, at the least, payment of interest on amounts that have been already recovered.