Govt moves to end legal battle with Vodafone, Cairn on retro tax

In a major policy shift, the government has moved The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha that will effectively allow the government to terminate the retrospective tax demand from Vodafone and Cairn India provided that they withdraw proceedings at international appellate tribunals and courts without seeking any damages and cost of litigation among other things, writes ETV Bharat's Deputy News Editor Krishnanand Tripathi.

New Delhi: In a major policy shift, Prime Minister Narendra Modi’s government has shifted the gear to end complex litigations arising out of an UPA era amendment in the income tax law that authorised the government to raise tax retrospectively from the foreign firms such as Vodafone and Cairn but led to legal setbacks at international arbitration tribunals.

Finance Minister Nirmala Sitharaman Thursday moved The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha that will effectively allow the government to terminate the retrospective tax demand from Vodafone and Cairn India provided that they withdraw proceedings at international appellate tribunals and courts without seeking any damages and cost of litigation among other things.

"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 28th May, 2012,” said the government. The Finance Bill of 2012 had received the Presidential assent on May 28 in 2012 when Pranab Mukherjee was finance minister under Prime Minister Manmohan Singh.

“The demand raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc shall be filed,” said the finance ministry. In the bill, the government also proposed that it would refund the amount paid in these cases without any interest thereon.

What the Bill says

In the statement of objects and reasons, the government said the issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company was a subject matter of protracted litigation.

The Bill said the Supreme Court verdict of 2012 that invalidated the tax demand was inconsistent with the legislative intent therefore the Income Tax Act of 1961 was amended in 2012 with retrospective effect.

The Bill said the amendment in 2012 was done to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India.

2012 amendment used to tax 17 cases

According to the amendment moved Thursday, Income Tax demand was raised in 17 cases and two cases are pending due to stay granted by High Court.

Arbitration under Bilateral Investment Protection Treaty with United Kingdom and Netherlands had been invoked in four cases and in two cases (Vodafone and Cairn) the Arbitration Tribunal ruled in favour of taxpayer and against the Income Tax Department.

Hurting investor's sentiment

In the Bill, the government admitted that the amendments made by the Finance Act of 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments.

“It is argued 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,” said the government.

In the Bill, the government admitted that the amendments made in 2012 and subsequent tax demands in a few cases continued to be a sore point with potential investors.

“The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment,” said the government.

It said the Bill proposes to amend the Income-tax Act so 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 28th May, 2012.