The Taxation Laws (Amendment) Bill, 2021, was just tabled in Parliament by the government. By modifying the Income Tax (IT) Act of 1961 and the Finance Act of 2012, the bill attempts to repeal the disputed retrospective tax law.
By amending the law in 2012, the government gained the ability to tax entities retroactively. Since then, the government has issued 17 tax requests. This includes tax charges against Vodafone, a British telecommunications firm, and Cairn Energy, a large gas business. In four cases, the government has received Rs 8,100 crore,
including Rs 7,800 crore from Cairn alone.
As a result, the firms filed appeals in international arbitration against the ruling. The Indian government has lost a number of retrospective taxation challenges both domestically and internationally. Last month, a French tribunal ordered the freezing of Indian assets as part of a guarantee of the sum due to Cairn.
In the instance of the Vodafone case, the Supreme Court had already decided against the tax authority’s retrospective interpretation of the statute. Despite this, the Indian government changed the tax legislation in 2012; giving it the authority to pursue mergers and acquisitions agreements dating back to 1962 if the underlying
asset was located in India.
The 2012 modification to the Income Tax Act was intended to address complicated transactions that managed to avoid taxes in India but resulted in a capital gains tax burden.
In 2007, the Vodafone Group’s Dutch arm purchased a Cayman Islands-based business that owned an indirect controlling share in Hutchison Essar Ltd, subsequently rebranded Vodafone India, for $11 billion.
It also covered Cairn Energy’s India unit’s internal restructure in 2006-07, just before it went public.
Retrospective taxation permits a government to enact legislation that taxes certain products, objects, or services in the past. These taxes are applied to businesses that existed before the law was passed, i.e. businesses that
existed before the law was passed.
Typically, countries use retrospective taxes to address inconsistencies in their taxation systems that have allowed corporations to exploit such loopholes in the past. However, firms who deliberately or mistakenly misinterpreted the tax regulations would be harmed by this retrospective
Retrospective modifications violate the concept of tax certainty and harm India’s image as a desirable location.
Companies have sought international arbitration as a result of the 2012 amendment.
While contesting tax claims made under the retroactive clause, India has lately been humiliated in international arbitration.
Critics term it as ‘Tax Terrorism’: Tax terrorism refers to the use of undue authority by tax officials to raise taxes through legal or illegal ways. In essence, tax terrorism is a result of the current tax system.
Complex tax system – Even seemingly simple transactions are subject to a slew of taxes. A complex network of levies obstructs the smooth flow of commerce.
Laws with ambiguity – This bends the law to the benefit of those who administer it. In situations like Vodafone and Cairn Energy Plc, ambiguous definitions have led to disagreements about the application of Minimum Alternate Tax, Capital Gains Tax, and other taxes.
High inequity – The IT Act authorizes the CBDT to issue notifications based just on the allegation that someone has under-reported their income or underestimated their taxes. Occasionally, the authorities’ discretion is abused.
Retrospective taxes in India have been challenged in the past, with the following rulings:
In lawsuits involving Vodafone and Cairn Plc last year, the government received two negative verdicts.
An international arbitration panel decided last year that India’s imposition of tax responsibility on Vodafone violated a contract between India and the Netherlands.
The Permanent Court of Arbitration at The Hague awarded Cairn damages of more than $1.2 billion in the retro tax dispute in December.
As part of a guarantee of the sum due to Cairn, a French tribunal ordered the freezing of 20 assets owned by the Indian government last month.
Devas Multimedia, which won a contract cancellation lawsuit against Antrix Corporation (a subsidiary of the Indian Space Research Organisation). Nine arbitrators and three foreign tribunals had ruled that the termination of the Devas-Antrix’s contract was illegal, as Devas later contended in a US court. Each of these lawsuits has a total value of $160 million dollars.
Devas Multimedia is seeking a $1.3 billion award to take Air India assets overseas, following the Cairn case in the United States. The Taxation Laws (Amendment) Bill, 2021, has the following key points:
Tax claims on offshore transactions undertaken before the modification to the Income Tax Act were enacted on May 28, 2012, will be invalidated under the new bill.
The administration has also recommended that firms be reimbursed for whatever legal fees they have spent, with no interest.
The Indian government demands certain criteria are met to avail the benefits, such as companies withdrawing ongoing lawsuits and agreeing that no claim for costs, damages, or interest will be made.
Importance of Repeal of Retrospective Taxation Laws:
While the sovereign right to taxation" is preserved, the amendment also gives businesses a reasonable opportunity to address the matter.
It is a positive step for international investors, and it will lead to an increase in foreign investment.
The need of the hour is for the economy to recover quickly. Foreign investment would play a key role in fostering quicker economic growth and employment in this approach.
It is consistent with the government’s goal of establishing a tax climate that is not combative.
It’s a great chance for the impacted taxpayers to settle all of their previous disagreements and prevent the expenses of future litigation.
Apart from resolving complaints about ambiguity, the measure is likely to settle lawsuits with 17 firms, including Vodafone and Cairn.
The amendment also strikes a balance between two opposing goals.
One, the government’s policy of having a predictable tax structure.
Two, India is concerned about the adjudication of Indian tax law by foreign tribunals.
This is an endeavor, rather than arbitration, to achieve a settlement via
the sovereign methods of Indian law.
The government must now be liberal in its settlements with businesses that have been harmed by a policy that it recognizes has been counterproductive to 0India’s growth.