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Retrospective tax policy: NDA called it tax terror; took 7 years and adverse verdicts to course-correct

Though delayed, the decision sends out a loud and clear message to global investors that India will course-correct, and bite the bullet even if circumstances around it aren't exactly propitious. The move also sets out India’s stand as a nation on the principle of taxation.

Written by Pranav Mukul , Aanchal Magazine , Sunny Verma | New Delhi |
Updated: August 11, 2021 1:45:53 pm
Union Finanace Minister Nirmala Sitharaman at BJP headquarters in New Delhi. (PTI Photo: Arun Sharma, File)

It took over seven years, and the possibility of an adverse verdict in international arbitration rulings, for the BJP-led government to withdraw the retrospective taxation amendment in I-T Act introduced in March 2012, by Pranab Mukherjee, the then Finance Minister in the UPA government.

Though delayed, the decision sends out a loud and clear message to global investors that India will course-correct, and bite the bullet even if circumstances around it aren’t exactly propitious. The move also sets out India’s stand as a nation on the principle of taxation.

Though the Centre stressed on the need to establish its sovereign right to tax, the scrapping of the retrospective levy provides clarity to investors by removing a major source of ambiguity on taxation laws.

While Mukherjee’s Union Budget 2012-13 did not directly mention the issue of the retrospective taxation, a closer reading of the accompanying Finance Bill and the memorandum that formed part of the Budget documents revealed one of the most consequential and controversial amendments to the tax laws that was put in place retrospectively.

This was in response to a Supreme Court verdict, which had held that Vodafone cannot be taxed for a 2007 transaction that involved its purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion. Mukherjee did not budge from the decision despite reservations within his Cabinet colleagues including the then Prime Minister Manmohan Singh.

A customer exits a Vodafone Idea store in Mumbai on January 19, 2020. (Bloomberg Photo/File)

While the NDA government, in Opposition at that time, termed this use of power as “tax terrorism”, the issue dragged for almost seven years. NDA government’s key strategist and the then Finance Minister Arun Jaitley argued against the principle of retrospective taxation on numerous occasions. In July 2014, presenting the Budget, Jaitley had said that the NDA government will not retrospectively create a fresh tax liability and that all fresh cases arising out of 2012 retrospective amendments will be scrutinised by a high-level committee before any action is initiated.

“…consequent upon certain retrospective amendments to the Income Tax Act 1961, undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion,” Jaitley had said.

Jaitley later termed the Vodafone tax erroneous and said it will only scare investors away, but the BJP government desisted from withdrawing the tax.

While the government largely held onto its commitment on no retrospective taxation, the existing cases continued to drag for years. Government has collected nearly Rs 8,100 crore in taxes under the existing law, out of which Rs 7,800 crore from Cairn Energy alone.

“Despite the angst that my proposal generated at that time, and even now, both from within my party and outside, I wonder why every succeeding finance minister in the past five years has maintained the same stance”, Mukherjee wrote in his book ‘The Coalition Years 1996-2012’.

The latest move to amend the law is being seen as a strategic rethink at the highest political level, coming in response to the government having suffered reverses in its arbitration case against Cairn Energy and the latter securing an order to freeze Indian assets in Paris last month. The Arbitral tribunal, which had its seat in the Hague, has asked India to pay Cairn an award of $1,232.8 million plus interest and $22.38 million towards arbitration and legal costs.

In response, the finance ministry had then said that it is ‘vigorously defending’ its case against the international arbitration order and asserted India’s “sovereign right to taxation” cannot be questioned overseas. Government officials reiterated this stance arguing that India is not accepting the arbitration awards but has put forward a solution to ensure a predictable tax regime for domestic and foreign investors.

The arbitration tribunal that was approached by Vodafone to challenge the retrospective tax demand ruled unanimously in favour of the British telecom company — meaning that even India’s nominee had voted against the government, something that experts suggest makes it difficult for an appeal to overturn the original order. Even in Cairn Energy’s case, the arbitration tribunal had ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty. The Indian government subsequently appealed against both the arbitration awards.

“The addressal of the long pending ask of foreign investors for removal on retrospective tax levy on indirect transfers would go a long way in placing India as a more attractive investment destination and rekindle the hope that there would be no longer any ghost of retrospective taxation norms being applied,” said Amrish Shah, Partner, Deloitte India.

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