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Doing Away with Retrospective Tax

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August 07, 2021

Why in news?

  • The Union Finance Minister recently introduced the Taxation Laws (Amendment) Bill in the Lok Sabha.
  • A key provision was doing away with the contentious retrospective tax law of 2012.

What is a retrospective tax?

  • A retrospective tax taxes a transaction that took place prior to the law being framed.
  • It can be a new or additional charge on transactions done in the past.
  • Countries use this form of taxation to rectify any deviations in the taxation policies.
  • Retrospective tax affects companies that had unknowingly or knowingly used the tax rules differently.

What is India’s retrospective tax law of 2012?

  • The retrospective tax provision was introduced in 2012 as an amendment to the Income Tax Act, 1961.
  • It allowed the government to tax companies on mergers and acquisitions (M&As) that happened before 2012.
  • In effect, it aimed to bring past indirect transfer of Indian assets under the ambit of taxation.
  • The law was thus used to raise large tax demands on foreign investors like Vodafone and Cairn Energy.
  • It was hence blamed for impairing India’s investment climate.

What are the two major cases in this regard?

  • UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion.
  • To this transaction, the Indian government raised a demand of Rs 7,990 crore in capital gain.
  • It said the company should have deducted the tax at source before making a payment to Hutchison.
  • The company took the matter to the Supreme Court.
  • The Court ruled in favour of Vodafone saying that it could not be taxed retrospectively.
  • To overcome the legal hurdle, the retrospective taxation law was introduced.
  • With this, the I-T department slapped Rs 3,100 crore tax notice on Vodafone India.
  • Anothersuchmove was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.
  • Both Cairn and Vodafone filed lawsuits in international courts against India’s retrospective tax.
  • Separate international arbitration tribunal verdicts in the Vodafone and Cairn cases have ruled against India’s retrospective tax demands.
  • The tax amendment now has been prompted by Cairn Energy’s relentless pursuit to enforce the arbitration award.

What are the current changes?

  • The Taxation Laws (Amendment) Bill nullifies the relevant retrospective tax clauses introduced in 2012.
  • As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped.
  • And any taxes already collected shall be repaid, albeit without interest.
  • To be eligible, the concerned taxpayers would have to drop all pending cases against the government.
  • They should also promise not to make any demands for damages or costs.
  • Going ahead, India needs to demonstrate greater clarity and consistency in policy across the board (trade tariffs, GST, etc.,) to fix its broken credibility.

 

Source: The Hindu, Business Standard

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