Recently, the finance minister introduced the Taxation Laws (Amendment) Bill in the Lok Sabha to nullify the tax clause provision that allows the government to levy taxes retrospectively.

• The government has been fighting legal cases against Vodafone and Cairn Energy on taxes it has claimed retrospectively on transactions these entities entered into relating to operations in the country.
• Both the U.K.-based companies have won international arbitration rulings that held the Indian government in breach of bilateral investment protection agreements with the Netherlands and the U.K. respectively.

Genesis of the retrospective tax imbroglio:

Case of Vodafone:

• In May 2007, Vodafone bought Hong Kong-based Hutchison Whampoa’s controlling stake in Hutchison Essar for $10.9 billion.
• The transaction took place in the Cayman Islands where Hutchison’s HTIL unit owned 100% of CGP Investments (the actual stakeholder in Hutchison Essar), which in turn was acquired by Vodafone’s Netherlands-based Vodafone International Holdings.
• That September, 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.
• 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.

Case of Cairn Energy U.K.:

• Separately, in 2006-07, Cairn Energy U.K. had reorganised its Indian oil and gas exploration business ahead of a planned IPO in India.
• Subsequently, Cairn Energy sold part of its stake in Cairn India Ltd., first to Malaysia’s Petronas, and then the Vedanta Group during the 2009-11 period.
• The retrospective tax provisions were applied to Cairn, when it was exiting from Cairn India Ltd in January 2014. The initial demand was for ₹10,570 crore.

What is retrospective taxation?

It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.

• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• Retrospective Taxation hurts companies that had knowingly or unknowingly interpreted the tax rules differently.

What are the proposed changes?

The Taxation Laws (Amendment) Bill proposes to do away with retrospective taxation on the sale of assets in India by foreign entities executed before May 2012.

• Though, the Bill includes a caveat — the companies that will benefit from the amendment must withdraw all legal cases against the government and forfeit interest, costs and any damages.
• The government, on its part, is willing to refund any tax dues it may have collected or seized.
• At ₹7,900 crore, the amount transferable to Cairn Energy takes up the bulk of the total ₹8,100 crore of such proposed refunds.

Why did the government decide to rescind the provision?

Though the government had raised tax demands in 17 such cases, Vodafone and Cairn attracted the most attention.

Both initiated international arbitration under bilateral agreements.

• Vodafone got a favourable ruling in September 2020 at the Permanent Court of Arbitration at The Hague in the ₹22,000-crore case.
• In December, an Arbitral Tribunal ruled in favour of Cairn, awarding it $1.2 billion plus interest and costs in damages, which came to $1.7 billion in total.
• India has appealed against both rulings.
• This year, Cairn had applied in courts in the U.S., Canada, Singapore, Mauritius and the Netherlands for seizure of Indian assets such as the state-owned national carrier Air India’s aircraft.
• It also obtained a legal order in France freezing some real estate assets owned by India in Paris, valued at about $24 million.
• Though the cases are in appeal, the loss of the arbitration cases and Cairn’s pursuit of India’s assets abroad may have forced the government’s hand.

Significance of the Move:

• Government’s this move attempts to end long-pending disputes with foreign firms such as Vodafone Plc.
• It is also investor-friendly, and brings to an end messy litigation and arbitration, especially with Cairn, which has seen the company staking claim to India’s overseas assets.

Source: The Hindu