Explained: The controversial Retrospective tax law in India

New Delhi, Aug 06: The Lok Sabha on Friday passed the Taxation Laws (Amendment) Bill, 2021 that seeks to bury the controversial retrospective tax amendments made in 2012 that had adversely impacted India's image as an investor-friendly destination.

The bill seeks the withdrawal of tax demand made on "indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e. the day the retrospective tax legislation came into being)."

"It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before May 28, 2012, shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed."

The move came after, Cairn and Vodafone filed lawsuits in international courts last year against the retrospective tax, both of which India lost.

What is Retrospective tax law in India?

The 2012 law, commonly referred as retrospective tax law, was enacted after the Supreme Court in January that year rejected proceedings brought by tax authorities against Vodafone International Holdings BV for its failure to deduct withholding tax from USD 11.1 billion paid to the Hutchison Telecommunications in 2007 for buying out a its 67 per cent stake in a wholly-owned Cayman Island incorporated subsidiary that indirectly held interests in Vodafone India Ltd.

The Finance Act 2012, which amended various provisions of the Income Tax Act 1961 with retrospective effect, contained provisions intended to tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as Vodaone's transaction with Hutchison in 2007. It sought to subject a purchaser, such as Vodafone, to a retrospective obligation to withhold tax.

Using that law, tax authorities in January 2013 slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest but no penalties. In February 2016, it updated the tax demand to Rs 22,100 crore plus interest.

Vodafone challenged this tax demand by bringing an arbitration proceeding under the Netherlands-India Bilateral Investment Treaty. The arbitration tribunal unanimously ruled in Vodafone's favour.

In the separate case of Cairn, India has been asked to pay with interest the value of shares it sold, the dividend it seized, and tax refunds it withheld to recover part of tax demand from the British firm.

Cairn Energy, which gave the country its biggest oil discovery, was in March 2015 slapped with a demand for Rs 10,247 crore tax on alleged capital gains it made when it in 2006 reorganised its India business before listing of the local unit.

Vodafone wins retro tax fight against India

Vodafone won an arbitration against the Indian government over a demand for Rs 22,100 crore in taxes using retrospective legislation.

An international arbitration tribunal ruled that India''s demand in past taxes were in breach of fair treatment under a bilateral investment protection pact.

In a statement at the time, the company had said the court had ruled that "any attempt by India to enforce the tax demand would be a violation of India's international law obligations". It also pointed out that the court had rendered an unanimous decision, which means the arbitrator appointed by India, too, backed the verdict.

Where does India's retrospective tax policy stand today?

The Lok Sabha passed the Taxation Laws (Amendment) Bill, 2021 that seeks to withdraw all tax demands under the retrospective law brought in 2012. This is seen as a step in the direction of addressing the long-pending demand of foreign investors seeking the removal of retrospective tax for the sake of better tax clarity. It has come after seven years into the tenure of the NDA government.