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HomeEconomyModi govt finally moves to bury controversial UPA era retrospective tax ghost

Modi govt finally moves to bury controversial UPA era retrospective tax ghost

Decision will end India’s dispute with Vodafone Plc and Cairn Energy Plc, and in 15 other similar cases. FM Sitharaman notes that the retrospective tax became a ‘sore point’ with investors.

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New Delhi: The Narendra Modi government Thursday moved to permanently bury the controversial retrospective tax amendments made in 2012 that had adversely impacted India’s image as an investor-friendly destination.

The government tabled a bill in the Lok Sabha that seeks to amend the Income-Tax Act, 1961 to do away with the retrospective tax amendment in the I-T laws.

When passed, the bill is likely to effectively end India’s dispute with Vodafone Plc and Cairn Energy Plc, and also in 15 other similar cases, where the I-T department had raised tax demands based on these retrospective changes to tax laws.

The bill has been introduced at a time the government has lost against both Vodafone and Cairn Energy in international arbitration. Cairn Energy has even been aggressively moving to enforce its $1.7 billion award by confiscating Indian assets overseas.

In the statement of objects and reasons for the bill, Finance Minister Nirmala Sitharaman pointed out that retrospective taxation continues to be a “sore point” for investors.

“In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors,” Sitharaman said.

“The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment,” she added.  

In 2012, India, under then finance minister Pranab Mukherjee, retrospectively changed the I-T Act to tax transactions involving sale or transfer of shares that take place outside India but where the underlying assets are located in India.

The amendment was introduced to nullify an adverse Supreme Court ruling of the same year wherein the apex court had ruled against the I-T department’s move to levy capital gains on an overseas share sale transaction involving Vodafone Plc. 

Since this controversial amendment, India has been fighting cases against companies in local courts and in international arbitration tribunals.

Also read: As Indians step out to shop, holiday, petrol demand looks at a V-shaped recovery

What does the bill propose? 

The bill addresses both future and existing demands under the retrospective amendment.

It proposes that no tax demand will be raised in the future under this retrospective amendment if the transactions were undertaken before the Finance Act of 2012 came into effect on 28 May 2012. 

Further, for cases where the tax demand has been made for transactions completed prior to 28 May 2012, the demand will be “nullified on fulfilment of specified conditions”.

These conditions include withdrawal of pending litigation, and furnishing of an undertaking that no claim for cost, damages and interest will be filed. In addition, the bill also proposes to refund the amount collected as taxes without any interest.

These amendments, however, won’t exempt transactions involving indirect transfer of shares undertaken after 28 May 2012 from the provisions of the I-T Act.

(Edited by Amit Upadhyaya)

Also read: Growth, not stubborn inflation, to be focus of RBI policy meeting this week


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