Retrospective taxation and the Taxation Laws (Amendment) Bill – Explained, pointwise

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. 

By the 2012 amendment, the government permitted itself to tax entities retrospectively in 2012, the government has so far made 17 tax demands. This includes tax claims against British telecom company Vodafone and gas major Cairn Energy. The government has collected Rs 8,100 crore in four cases, including Rs 7,800 crore from Cairn alone.

It resulted in the companies making appeals against this decision in the international arbitration. Indian government lost various retrospective Taxation cases within India and abroad also. The recent one was the French tribunal’s last month order to freeze Indian properties as part of a guarantee of the amount owed to Cairn.

What is retrospective taxation?

Retrospective taxation allows a country to pass a rule on taxing certain products, items, or services. This taxation is applied to the companies from a previous date, i.e. before the date on which the law is passed.

Usually, the Countries apply retrospective tax to correct anomalies in their taxation policies, that have, in the past, allowed companies to take advantage of such loopholes. But, this retrospective tax hurts companies that had knowingly or unknowingly interpreted the tax rules differently.

In the past, many other countries like the USA, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have retrospectively taxed companies.

The History behind retrospective tax law 

• 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 2012 amendment to the Income Tax Act aimed to tackle complex transactions that manage to escape taxation in India involving a capital gains tax liability here. 
• That included the Dutch arm of Vodafone Group buying a Cayman Islands-based company in 2007, which indirectly held a majority stake in Indian firm Hutchison Essar Ltd later renamed Vodafone India for $11 billion. 
• It also covered Cairn Energy’s internal restructuring of its India unit in 2006-07 before it went public. 

Salient provisions of the Taxation Laws (Amendment) Bill, 2021

• According to the new bill, tax claims made on offshore transactions, executed before 28 May 2012, when the amendment to the Income Tax Act was brought out, will be nullified. 
• The government has also proposed to refund the amount paid in litigation by companies without any interest thereon. 
  • Note: The total amount involved for all cases is about Rs 8,100 crore.
• However, the demand raised by the Indian government will be nullified based on Specific conditions such as  
  • Withdrawal of pending litigation  
  • Companies furnishing that no claim for cost, damages, interest, etc. will be claimed
• Government sources said the move was meant to send a positive message to the investor community. 

Implications of Retrospective taxation laws 

• Retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination 
  • For instance, the 2012 amendment had resulted in companies seeking international arbitration. 
• India has recently suffered various humiliations in international arbitration while challenging tax demands made under the retrospective clause. 

Rulings against India’s retrospective taxation in the past:

Last year, the government received two adverse rulings in cases involving Vodafone and Cairn Plc 

• India’s imposition of tax liability on Vodafone breached an investment treaty between India and the Netherlands, ruled an international arbitration tribunal last year 
• Cairn was awarded damages of more than $1.2 billion in December by the Permanent Court of Arbitration at The Hague in the retro tax case. 
  • A French tribunal last month ordered a freeze on some 20 properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn. 
• Devas Multimedia, which has won a case against Antrix Corporation (a subsidiary of the Indian Space Research Organisation) for arbitrary cancellation of a contract. As Devas subsequently argued in a US court, nine arbitrators and three international tribunals had deemed the termination of the Devas-Antrix deal as unlawful. The sums involved in each of these cases amount to $160 million dollars.
  • Following Cairn’s lawsuit in the US, Devas Multimedia is also seeking a $1.3 billion award to seize Air India’s assets abroad.

Significance of Curbing Retrospective taxation laws 

• The amendment while maintaining the “sovereign right to taxation”, also provides a reasonable opportunity to companies to resolve the issue. 
• It is a welcome move for foreign investors, and it will directly result in attracting more foreign investments. 
• Quick recovery of the economy is the need of the hour. In this direction, foreign investment would play an important role in promoting faster economic growth and employment 
• It is in line with the government’s commitment to creating a non-adversarial tax environment. 
• It is a good opportunity for the affected taxpayers to close all the past disputes and avoid future litigation costs 
• The move is expected to end litigation with 17 companies, including Vodafone and Cairn, apart from addressing criticism about uncertainty 
• The amendment also balances two different objectives.  
  • One, the policy of the government to have a predictable tax regime.  
  • Two, India’s concern towards the adjudication of Indian tax law happening through foreign tribunals. 
  • This is an attempt to find a solution through the sovereign means of Indian law and not through arbitration 

Suggestions

The government now needs to be generous in its settlements with the companies that have been affected by an action that it accepts has been counter-productive for India’s development. 

Sources: Indian Express, Live Mint, Business Standard (Article 1, Article 2), Times of India