Govt scrapping retro tax an 'extremely positive development': Sanjay Tolia

This proposal demonstrates that the government is intent upon shoring up India's positive investor friendly image, says Partner, Price Waterhouse & Co LLP

In a bid to bury the ghost of retrospective taxation, the government on Thursday brought a bill in the Lok Sabha to withdraw all back tax demands on companies such as Cairn Energy and Vodafone and said it will refund about Rs 8,100 crore collected to enforce such levies.

Finance Minister Nirmala Sitharaman introduced 'The Taxation Laws (Amendment) Bill, 2021' in the Lok Sabha that seeks to withdraw tax demands made using a 2012 retrospective legislation on indirect transfer of Indian assets prior to May 28, 2012.

"It is also proposed to refund the amount paid in these cases without any interest thereon," the bill said.

Sanjay Tolia, Partner, Price Waterhouse & Co LLP, said this is an "extremely positive development".

"In an extremely positive development, the government of India has proposed that taxation on indirect transfer of shares shall apply only prospectively from 2012. Consequently, in relation to indirect transfers before 2012, all litigation and tax collection measures from the government will end provided the affected companies consent to withdraw from all pending litigation and waive all rights in all forums including arbitration. The government will refund all taxes collected without interest.

"The indirect transfer taxation provisions were introduced in 2012 retrospectively in the backdrop of the Supreme Court ruling in the case of Vodafone. This led to several cases of demands raised by the income tax authorities where indirect transfer of shares of Indian companies had happened before 2012. Many of these cases ended up in litigation in Indian courts and in international arbitration tribunals invoking bilateral investment protection treaties. In some cases, tax was recovered by the income tax authorities. This created negative investor sentiment and perception. This proposal demonstrates that the government is intent upon shoring up India’s positive investor friendly image and continue the momentum towards creating India as an attractive investment destination thereby promoting faster economic growth and employment," said Tolia. 

Besides creating uncertainly in minds of investors, the retrospective taxes have in recent months been overturned by international arbitration tribunals in two high profile cases -- UK telecom giant Vodafone Group and oil producer Cairn Energy.