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What is a retrospective tax law?
A retrospective tax law enables the government to tax transactions that occurred long before the law was framed. Ideally, it should be used to make sure that the companies did not use the previous taxation laws as a loophole. This way the government can correct the situation.
When and why in India?
It was originally introduced by the then president Pranab Mukherjee in Budget 2012 as an amendment to Section 9 of the Income Tax Act of 1961. The reason behind this was the ruling made by the Supreme Court(SC) in the Vodafone case where the tax department lost around Rs 14,000 crore as Vodafone bought Hutchison Telecom’s share in Hutchison Essar.
With this law, India could charge tax for mergers and acquisitions of the companies which had a majority of their assets in India.
The Vodafone case
Through the Dutch counterpart of Vodafone, the British telecom major bought a majority stake in Hutchison Whampoa for around $11 billion back in 2007. This made the Indian government demand Rs 7990 crore as withholding tax from Vodafone. As the government won the case in the Bombay High Court, the company appealed to the SC which ruled in its favour in 2012.
Vodafone then invoked the Bilateral Investment Treaty between India and Netherlands at the Court of Arbitration at The Hague where the government lost.
The Cairn UK case
Unlike Vodafone’s purchase, Cairn just reorganised its subsidiaries in 2006-2007 where Cairn UK gave Cairn India the shares of Cairn India Holdings. The government demanded Rs 31,881 crores worth of tax by March 2015. In 2014, the government used the retrospective law to claim and sell the company’s shares when Cairn wanted to sell its final 10 per cent stake in Cairn India Ltd to Vedanta Resources Ltd. In response the company moved to the international tribunal demanding the return of the value of the shares it had seized and sold, tax refund withheld and dividend confiscated to enforce the retrospective tax demand.
After the Centre’s refusal, the company moved to a US court seeking a seizure of Air India’s assets (a public property) and a French court also ruled in its favour freezing 20 properties of India in Paris as recovery of Rs 8,897 crore plus interest and penalties.
Why does it matter?
The thing is India wants to be an investment destination on its road to economic recovery. If our sovereign assets continue to be endangered, it would be a hindrance. The finance minister believes that the retrospective amendment is a sore point with potential investors. The only situation seemed to be getting rid of this law while keeping long term benefits in mind instead of short term tax income.
What happened now?
On 5th August, the centre moved a bill in the parliament to scrap the law. The bill proposes a refund of the taxes collected under the previous law; especially Cairn with about Rs 7900 crore on the condition that all taxpayers withdraw every legal case.
Refreshingly, even the opposition has welcomed this move by the Centre. Congress House leader Adhir Chowdhury has stated that this bill is according to the Supreme Court’s verdict as well as appropriate with international disputes.
What do you think? Will this end all the disputes and open up future investment options?
This article has been written by Ruchi Thakur for The Paradigm
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