Context:
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Government has decided to scrap retrospective taxation.
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Adverse decision of International Arbitration Court in Cairn case.
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Appeal by Indian authorities against Vodafone case decision.
Vodafone and Cairn cases:
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An international arbitration court has turned down tax authorities’ demand for 22,100 crore in retrospective taxes and penalties relating to the Vodafone’s acquisition of an Indian operator in the year 2007.
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The 2012 law that enabled tax authorities to issue tax notices under retrospective tax provisions has been the bone of contention.
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The tax authorities’ power to reopen past cases, to seek taxes from Vodafone and Cairn over alleged capital gains made several years ago was challenged by both Vodafone and Cairn under bilateral investment protection treaties and initiated the arbitration.
Bill to nullify retrospective tax law:
The government has introduced the Taxation Laws (Amendment) Bill, 2021, in Parliament. The bill seeks to nullify the contentious retrospective tax law by amending the Income Tax (IT) Act of 1961 and the Finance Act of 2012.
Evolution of retrospective taxation in India:
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Earlier, the Supreme Court had ruled against the retrospective reading of the law by tax officials in the case of Vodafone.
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Despite that, In 2012, the Indian government then retrospectively amended the tax code, giving itself the power to go after mergers and acquisitions(M&A) deals all the way back to 1962 if the underlying asset was in India.
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The present government called the retrospective provisions a form of ‘tax terrorism’ and introduced a law to nullify them.
Issues with the 2012 amendment:
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Immediately, several large transactions done by foreign companies prior to 2012 came into the tax officials net.
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Foreign investors were naturally alarmed that the Indian government could go back in time and charge them for transactions legitimately done in the past.
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The arbitration cases internationally led to large awards upwards of $1 billion against India, including interest and damages.
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Further, the winning parties started enforcing their award in foreign courts and dented India’s image internationally.
Conclusion
India needs to demonstrate greater clarity and consistency in policy across the board to fix its broken credibility.