Taxation Laws (Amendment) Bill passed, nullifies retrospective tax: All you need to know
Union finance minister Nirmala Sitharaman while replying to the debate on the bill said that India’s sovereign right to tax will remain ‘intact’ and nothing is being ‘diluted’.
The Rajya Sabha on Monday passed the Taxation Laws (Amendment) Bill, 2021, which plans to do away with the retrospective tax provision and end all retrospective taxes imposed on indirect transfer of Indian assets made before May 28, 2012. This means that the tax demands made on companies like Cairn Energy and Vodafone will now be withdrawn. The tax demand that was made using the Finance Act, 2012, will also be withdrawn.
Union finance minister Nirmala Sitharaman while replying to the debate on the bill said that India’s sovereign right to tax will remain ‘intact’ and nothing is being ‘diluted’. She also pointed out that former Union finance minister P Chidambaram earlier welcomed the same bill when it was passed in the Lok Sabha. “I would like to remind them that when this was passed a couple of days earlier in the Lok Sabha, a former finance minister belonging to the Congress welcomed it. He also said that it should have come early but it is alright that it has come now,” the finance minister said.
She also said that Trinamool Congress MP Sougata Ray and Congress MP Shashi Tharoor have also called for a similar measure. “There is no one view coming from the Congress party. They will say something here and they said something else when they were in power. They are afraid that since we are doing the right thing, the credit will come to us,” Sitharaman said in the Rajya Sabha.
Where did it all begin?
Sitharaman said on Monday that the Finance Act, 2012, was a clarificatory amendment brought by the Congress against a Supreme Court order. She was referring to the amendments brought to the Finance Act, 2012, by then finance minister late Pranab Mukherjee. That act allowed the taxman to levy taxes claims retrospectively on deals that were executed after 1962 that involved the transfer of shares in a foreign entity that has its assets in India.
Burying the ghost of retrospective taxation
The issue with retrospective tax began after the government in 2007 asked telecom giant Vodafone to pay capital gains tax after it bought a majority stake in the telecom operations of Hutch in India. The government of India then sent a notice to Vodafone seeking ₹11,218 crore claiming it withheld tax in the purchase and also imposed penalties worth ₹9,500 crore.
The amendment was then brought by the UPA-led government after the Supreme Court ruled in favour of the telecom company and said that there was no tax liability on Vodafone’s part.
Dispute with Cairn
The matter came again into the limelight after British energy major Cairn was asked to pay ₹10,247 crore in 2014 because of its move in 2006 to bring its assets under a single holding company, Cairn India Ltd during which it paid no tax during the process.
The government decided that Cairn made capital gains during the process and sought ₹31,881 crore in taxes in 2015. This happened despite Cairn India being acquired by mining giant Vedanta who bought most of the shares of Cairn India Ltd when it floated an initial public offering to divest 30% of its ownership in the company.
Cairn, Vodafone in Permanent Court of Arbitration
Cairn and Vodafone both moved the Permanent Court of Arbitration in the Hague in the Netherlands. Cairn claimed that the government violated the India-UK Bilateral Investment Treaty. The international court ruled in favour of Cairn and awarded it $1.4 billion in damages. After the Indian government refused to pay the claims, Cairn moved a French court which gave the order to freeze Indian assets in Paris to recover ₹8,897 crore.
In the case of Vodafone, the international court maintained that India did not treat Vodafone in an ‘equitable and fair’ manner as per the India-UK Bilateral Investment Treaty.
Along with Sitharaman, BJD lawmaker Amar Patnaik pointed out in the Rajya Sabha that the amendments brought by the finance minister is timely as India aims to portray itself as an investment destination to investors across the world. Patnaik also said that the Vodafone and Cairn cases cast a negative impact on the minds of investors who are planning to invest in India.
“This amendment is required especially at a time when we want to show that India is a responsible democracy. We take our laws seriously, particularly tax-related laws, and we take them with consistency. Without consistency businesses will be unable to move forward,” Sitharaman said, signalling that ending the retrospective tax regime will allow investors to enter India in a fearless manner.