Retrospective Tax : Daily Current Affairs

Relevance: GS-2: Government policies and interventions for development an effective tax regime.

Key phrases: Retrospective Tax, Tax Evasion, Tax terrorism, Income Tax Act, 1961, Capital gain tax, cairn energy

Why in News?

  • In what should be the last act of a long and winding tax dispute drama, British firm Cairn Energy has said it has concluded all steps prescribed by the Indian government in order to be eligible for the refund of a contentious retroactive tax levy.

What is Retrospective Tax?

  • A retrospective tax is one that is charged for transactions in the long past. It can be a new or additional charge on transactions done in the past. Ideally, retrospective tax is to make adjustments when policies in the past and the present are so vastly different that tax paid before under the old policy could be said to have been less. Retrospective tax could correct that situation by charging tax under the existing policy.
  • Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and deals and charge companies from a time before the date on which the law is passed.
  • Countries use this form of taxation to rectify any deviations in the taxation policies that, in the past, allowed firms to take benefit from any loophole. Retrospective tax affects companies that had unknowingly or knowingly used the tax rules differently.
  • Not only India, but many other countries like the US, UK, Australia, Netherlands, Belgium, Canada, and Italy have retrospectively taxed firms.

History of the controversial Retrospective tax in India

  • "Retrospective Taxation", these two words have roiled foreign investors looking at India over the years, and led to multiple disputes between the Indian government and global majors like Vodafone and Cairn. The retrospective tax provision was introduced by the United Progressive Alliance (UPA) government in 2012. It was an amendment to the Income Tax Act, 1961, allowing the government to ask companies to pay taxes on mergers and acquisitions (M&As) that happened before that date. This goes back to the time when UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion to which the Indian government raised a demand of Rs 7,990 crore in capital gains saying the company should have deducted the tax at source before making a payment to Hutchison. The company took the matter to the Supreme Court which eventually turned in favour of Vodafone.
  • One such indirect transfer was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.
  • In September 2007, the Income tax department slapped Vodafone International BV with a tax demand of $2 billion. Five years later, SC set aside the I-T department's claim, saying transactions carried out in India cannot be taxed. Then Finance Minister Pranab Mukherjee brought in a bill, which was eventually passed by the Parliament that would force companies like Cairn and Vodafone to be liable to pay taxes based on retrospective changes to the law. I-T department slapped Rs 3,100 crore tax notice on Vodafone India.

Taxation Laws (Amendment) Bill, 2021

KEY HIGHLIGHTS

  • Taxation Laws (Amendment) Bill, 2021 seeks to withdraw tax demands made under the 2012 retrospective legislation to tax the indirect transfer of Indian assets
  • The bill proposes that any demand raised for indirect transfer of Indian assets made before May 28, 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 shall be filed.
  • The bill proposes to refund the amount paid in these cases without any interest.
  • It also proposes to amend the Finance Act, 2012 to provide that the validation of demand under section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified conditions.
  • The Bill states that the issue of taxability of gains arising from the transfer of assets located in India through the transfer of shares of a foreign company was a subject matter of protracted litigation.

SIGNIFICANCE

  • The bill is likely to benefit many companies including Vodafone and Cairn Energy who had to pay tax based on the retrospective tax demand provision.
  • The amendment will have a direct bearing on the long-running tax disputes.
  • As per the amendment, the centre will withdraw all back tax demands on companies and will refund the money collected to enforce such levies.
  • This is crucial as the country stands at a juncture today when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment will play a significant role in promoting faster economic growth and employment.

What is the impact of this Amendment?

  • The amendment could provide more clarity to the international investors regarding all the prospective or already existing investments.
  • Provide a stable and predictable tax regime which is necessary to promote private sector investment. Measures taken by the government resulted in an increase in FDI inflows in the country.
  • The scrapping of the retrospective tax regime will instil confidence of the private investors in India’s regulatory and tax framework.
  • The bill is also an opportunity for addressing some stressed sectors like the telecom and oil exploration sectors.

Way forward:

  • As part of the Government’s compromise formula worked out belatedly last August through amendments in the tax law, Cairn had to drop all legal proceedings seeking to enforce the arbitration award against India, forgo the damages and indemnify the Government against all future claims or liabilities.
  • Last month, Vodafone also availed these provisions. The Government should, on its part, work swiftly to process their paperwork and preferably remit their dues before the financial year concludes.
  • While this will be a necessary first step towards restoring some of the damage caused to Brand India, it may not be immediately sufficient — from labelling it as tax terrorism while in the Opposition, this government dithered on corrective action till its eighth year in office.
  • Whether this was an outcome of bureaucratic bravado, official obstinacy, political paralysis or a combination of all three, India needs to abandon such fickleness and demonstrate greater certainty and predictability across economic policy, be it about GST or global trade engagement, in order to bolster its credentials as an ideal investment destination.

Cairn- INDIA Dispute

The Cairn dispute arose in 2006-07 when Cairn UK transferred shares of Cairn India Holdings to Cairn India as part of its restructuring for an initial public offering (IPO). Prior to the IPO, Indian businesses were routed through a Cayman Islands-based subsidiary of Cairn UK. Subsequently, in 2011, the business of Cairn India was sold to the Vedanta group with Cairn India retaining a 9.8 percent share in Vedanta. In 2014, tax authorities alleged that Cairn UK had made capital gains of around 245 billion Indian rupees through the restructuring in 2006-07 and promptly raised a tax demand basis on the retrospective amendment of 2012. The tax authorities barred transfer of 9.8 percent of Vedanta’s shares to Cairn India pending adjudication of the demand, causing severe financial problems for Cairn India that led to 40 percent of its India staff being laid off.
In 2015, Cairn UK gave a notice of dispute under the India-U.K. BIT and requested for arbitration. While the arbitration was pending, in 2017, the tax authorities seized around 20 billion Indian rupees in dividends and tax refunds to the accounts of Cairn India. The tax authorities also attached the Cairn India shares and auctioned them to recover the alleged tax due. The dispute has finally resulted in the award by the International Tribunal whereby India has been ordered to pay 80 billion Indian rupees to Cairn for violations of its international commitments under the India-U.K. BIT. Interestingly, it is a unanimous award whereby the arbitrator appointed by India also ruled in Cairn’s favor.

Source: The Hindu

Mains Question:

Q. “After Abolishment of retrospective tax, India finally has an investor-friendly image after almost a decade and should strive to maintain it” Critically Analyse the statement.