End of retro tax

  • IASbaba
  • August 18, 2021
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07th Aug 2021, The Big Picture – Investment positive: End of retro tax



  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  • GS-3: Indian Economy & Challenges

End of retro tax

In News: The Taxation Laws (Amendment) Bill, 2021 passed by Lok Sabha offers to drop tax claims against companies on deals before 28th May 2012 that involve indirect transfer of Indian assets on fulfilment of specified conditions including the withdrawal of pending litigation and the assurance that no claim for damages would be filed. 

Background of the retrospective tax issue:

  • In 2006-2007 Vodafone (British company) acquired Hutchison Essar (Indian telecom company), for $11 billion in Caymans Island. 
  • So, the deal did not take place in India and because the transaction took place offshore or outside the Indian jurisdiction, the companies didn’t make any provisions for capital gains tax.
  • That September, when government noticed that to avoid the capital gain tax on the Indian property, such huge transaction was done offshore, India’s Income Tax Department served a notice on Vodafone for failing to deduct tax at source from the amount it paid to Hutchison in lieu of the capital gains tax it contended the seller Hutchison was liable for.
  • The case went to court and in January 2012, India’s Supreme Court backed Vodafone, ruling that indirect transfer of shares to a non-Indian company would not attract tax in India. 
  • The supreme court also said that the current law doesn’t allow Indian government to levy capital gain tax on international transaction even when the underlying asset is located in India. 
  • In the Union Budget of 2012, the then Finance Minister, introduced retrospective amendment to the capital gain tax, which says that from any 1962 in or onwards, any capital gain that arise out of a transaction even if its international in nature, but if the asset is located in India, then the entities will have to provide for capital gain tax to the union government.

The Taxation Laws (Amendment) Bill 2021 

  • The Taxation Laws (Amendment) Bill, 2021 seeks to amend the Income-Tax Act, 1961, and the Finance Act, 2012 and withdraw contentious retrospective tax demand provision.
  • It was introduced after India lost retrospective tax demand cases against Cairn Energy Plc. and Vodafone. 
  • The bill states that the demand had been raised in 17 cases and the retro tax was criticized for being against the principle of tax certainty and damaged India’s reputation as an attractive destination. It was a sore point for potential investors.
  • The bill also states that any demand raised for “indirect transfer of Indian assets made before May 28, 2012, shall be nullified on fulfilment of specific conditions such as:
    1. Companies that have been served with notices in past will have to withdraw all legal cases if any filed against government of India
    2. Both Vodafone as well as CAIRN should withdrawal any cases and they shouldn’t expect to claim any damages for cost, damages, interest, etc. from government of India. 
    3. For amicable settlement of disputes, the government will also refund amount paid in these cases without any interest.
  • Earlier, Finance Secretary T V Somanathan had said a total of Rs 8,100 crore was collected using the retrospective tax legislation. Of this, Rs 7,900 crore was from Cairn Energy alone. This money will be repaid.
  • If the companies will agree to these conditions, then the law will have a major impact.

Impact of the Taxation Laws (Amendment) Bill 2021 

  • Government sources said the move was meant to send a positive message to the investor community as it provides a reasonable opportunity to companies to resolve the issue. 
  • Apart from restoring India’s reputation as a fair and predictable regime, this will establish an investment-friendly business environment, which can increase economic activity and help raise more revenue over time for the government.
  • It is a welcome move for foreign investors, and it will directly result in attracting more foreign investments by improving the ease of doing business.
  • The move is expected to end litigation with 17 companies, including Vodafone and Cairn, apart from addressing criticism about uncertainty thus giving them a good opportunity to close all the past disputes and avoid future litigation costs. 

Can you answer this question now?

“The Taxation Laws (Amendment) Bill 2021 will end litigation with 17 companies, including Vodafone and Cairn, apart from addressing criticism about uncertainty thus giving them a good opportunity to close all the past disputes and avoid future litigation costs”. Elucidate.

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