Good sense, finally

Govt wasted nine years in trying to defend the indefensible retro tax

The government has introduced the Taxation Laws (Amendment) Bill, 2021, which seeks to amend the Income-tax Act of 1961 and the Finance Act of 2012 effectively to reduce the chances of retrospective tax demands by the authorities. This is a welcome act and should have been done much earlier. The 2012 Union Budget, of course, had introduced the notorious retrospective tax clause that allowed the income-tax authorities to try and claw back taxes on past transactions, even if the transactions were carried out abroad, if the transaction involved capital gains on “underlying assets” that might be considered to be located in India. Investors will also note that the new Bill is limited to tax demands raised prior to May 28, 2012, when the 2012 Budget came into force. In other words, the government is seeking to maintain its right to tax capital gains even in offshore transactions, and merely saying— almost a decade on— that it will not persist with demands related to transactions that took place prior to 2012.

The retrospective clause affected multiple disputes— primarily the one, existing in 2012, between Vodafone and the government. After 2012, a newly empowered income tax department also chased down other cases, such as against Cairn. The Bill as introduced claims that income-tax demands were raised in 17 related cases. It also admits that investors widely believe that “such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination”. This is, if anything, an understatement. Investors were not just doubtful about the Indian government’s desire to tax offshore transactions, but were also dismayed by the fact that even as the government post-2014 condemned the 2012 retrospective clause, it took no steps to take it out of the law books.

Such a legally mandated reversal of the 2012 amendments should have been introduced long ago. It would possibly have avoided the various humiliations that India has recently suffered in international arbitration challenging tax demands made under the retrospective clause. It is possible that this Bill is meant to legally empower a deal that the government has come to with companies that have won arbitration cases in the recent past—Cairn, for example, has been awarded $1.2 billion in damages, and another $0.5 billion or so in interest and legal costs by a tribunal last December. The Bill allows the government to refund what it has taken from Cairn and other such companies, though not the interest. The possibility that a deal has already been agreed does, however, tend to conflict with the statement given to the Lok Sabha just a few days ago by the Union minister of state for finance that no formal proposal to resolve the dispute “within the country’s legal framework” has been received as yet from Cairn.

The Bill as introduced allows the government to offer a deal to Cairn in which it repays a part of the total arbitration award, as long as Cairn withdraws all its litigation and promises not to sue for damages. The broader reputational harm, however, is not so easily countered. Partly this is because the government clearly has had its hand forced by legal losses and threats, and is not genuinely doing this in order to increase tax certainty. It now needs to be generous in its settlements with the companies that have been affected by an action that it accepts has been counter-productive for India’s development.