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Sunday, September 19, 2021

Govt does well to end retrospective taxation. It must ensure swift closure of pending cases

The retrospective amendment inflicted great damage to the country’s reputation for offering an attractive and predictable investment climate. It was long overdue that this amendment was given a burial.

By: Editorial |
Updated: August 7, 2021 7:17:30 am
The retrospective amendment inflicted great damage to the country’s reputation for offering an attractive and predictable investment climate.

After facing the prospect of its foreign assets being seized by Cairn Energy to enforce an international arbitration award, the Union government, on Thursday, introduced a Bill in Parliament seeking to bury the infamous retrospective taxation amendment. The Bill proposes to amend the Income Tax Act so as to ensure that no new tax demand can be raised on the basis of the retrospective amendment if the transaction was carried out prior to May 28, 2012. In cases where a demand has already been raised — such tax demands have reportedly been raised in 17 cases — the order will be nullified, provided certain conditions such as the withdrawal of appeals, claims are met. This is the right thing to do — even if it comes seven years into this government’s tenure, and after facing multiple setbacks in international arbitrations. The retrospective amendment inflicted great damage to the country’s reputation for offering an attractive and predictable investment climate. It was long overdue that this amendment was given a burial.

The case dates back to 2012 when the Supreme Court had ruled in favour of Vodafone on grounds that “gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act”. Thereafter, the government of the day introduced an amendment with retrospective effect, effectively nullifying the ruling. This opened the floodgates — tax demands were raised on several companies. While the current dispensation has done well to put this issue to rest, even though this is after it appealed against the international arbitration awards, an uncomfortable question remains. The Bill allows for the refund only of the principal amount in these cases, not the interest. However, considering that in some of these cases, the interest component is sizeable, will these companies avail the offer? While there is the possibility of a deal being struck, if the companies decide not to withdraw the cases, what will the stand of the Indian government be? Will the government continue to maintain its position regarding international arbitration awards? The retrospective amendment was bad enough. Not accepting the awards thereafter will further hurt the country’s reputation.

Considering that in the run-up to the 2014 elections, the BJP had attacked the then UPA government for unleashing “tax terrorism” and “uncertainty” in the country, the fact that it continued with these unjust tax demands, even appealing against international arbitration awards, was inexplicable. Claims of improving the ease of doing business and creating a welcoming environment for investors ring hollow when the policy environment continues to be uncertain. Prolonging this issue has only taken the sheen off the country’s projection of a business-friendly image, leading many to make unfavourable international comparisons. The government has done well to put this issue to rest, even if it was pushed into doing so.

This editorial first appeared in the print edition on August 7, 2021 under the title ‘Better late’.

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