In a jolt to international investors, Finance Minister Arun Jaitley on Thursday avoided repealing all retrospective tax legislation, asserting it was a "sovereign right" of the government.
He, however, announced the creation of a high-level committee under the Central Board of Direct Taxes (CBDT) to scrutinise any new case based on the retrospective amendments of 2012 in direct transfers, to avoid further litigation.
Asserting the new government was committed to providing a "stable and predictable" tax regime, Jaitley said the retrospective tax system would be invoked only in the rarest of rare cases, with "extreme caution and judiciousness".
Hinting at the pending cases of tax disputes arising out of the amendment to the Income Tax Act with retrospective effect, originally announced by the United Progressive Alliance government, Jaitley said that a few cases have come up in various courts concerning retrospective tax legislation. Such cases, he said, would be resolved under the due legal course. "This government will not ordinarily bring about any change retrospectively which creates a fresh liability… 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 said, while presenting the Budget.
One such case relates to British telecom giant Vodafone Plc's Rs 11,217-crore tax dispute when it acquired Hutchison Whampoa's Indian unit. Another such case relates to Cairn Plc, which apparently made capital gains of Rs 24,503.50 crore by transferring its India subsidiary to Cairn India in 2006 through Jersey.
In a strong message to the government, Vodafone, stated it would continue the process of international arbitration initiated under the India-Netherlands Bilateral Investment Treaty.
"From the outset, we have maintained that there was no tax to pay - a view upheld by India's Supreme Court - and the retrospective law in any case concerned tax on the gain made by Hutchison. Vodafone, as the buyer, clearly made no capital gain whatsoever," Vodafone India stated.
The widespread expectation was that the Bharatiya Janata Party government would do away with retrospective tax legislation. Experts said the finance minister had left the job half done and this would lead to further red tape.
Girish Vanvari, co-head of Tax, KPMG India, said, "While the commitment to no more retrospective amendments and a stable tax regime is a much needed welcome move to bolster investor confidence, how pre-2012 cases are dealt with will be critical."
The US-India Business Council said retrospective taxation was harmful for India's business climate and there should be further clarity in this regard.
Venu Srinivasan, chairman and managing director of TVS Motor, said though not much was clearly stated on the retrospective tax amendment issue, Jaitley made it amply clear the government would not resort to such practices unless extraordinary circumstances arise.
- Retrospective tax legislation to continue
- Government promises to exercise it with caution and judiciousness
- A high-level committee under CBDT to scrutinise future cases
- Pending cases to follow legal course
- Government promises stable and predictable tax regime