New Delhi: 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.
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.
While there was no substantial amount involved in the Vodafone case, in the case of Cairn Energy the tribunal had asked the Indian government to return the value of the shares it had seized and sold, tax refund withheld and dividend confiscated to enforce the retrospective tax demand.
With the government refusing to honour the award, Cairn Energy Plc moved court in the US to seize assets of Air India. It got an order from a French court to freeze 20 Indian properties in Paris to recover $1.2 billion-plus interest and penalties.
The move clubbed India with nations such as Pakistan and Venezuela that have faced similar actions by entities seeking enforcement of awards.
Reacting to development, Cairn said it has "noted" the introduction of the bill and is "monitoring the situation and will provide a further update in due course."
Finance Secretary T V Somanathan said a total of Rs 8,100 crore was collected using the retrospective tax legislation. Of this, Rs 7,900 crore was from Cairn Energy alone. This money will be repaid.
As much as Rs 1.10 lakh crore in back taxes was sought from 17 entities that were levied taxes using the 2012 legislation. Of these, major recoveries were made only from Cairn.
"The government's policy since 2014 has been that we do not support retrospective taxation. We need to also remember that this is a time when India needs a lot of investment. These were legacy disputes which dated back pre-2014," Somanathan said.
He said the government defended in arbitration India's sovereign right to tax and waited for the cases to reach their logical conclusion. "So it has been a balancing effort between the principle of sovereign right to tax and relief to those on whom taxes were due."
Revenue Secretary Tarun Bajaj said: "After reaching some conclusion in arbitration proceedings, we have taken this bold step to assure investor community about predictability in the tax regime."
The retrospective taxation continued to be a sore point and hence the government has voluntarily decided to bring in this bill to nullify all retro tax demands, he said.
"You cannot question India's sovereign right to tax, but as a matter of policy, we will not pursue retrospective taxation cases. It is not a question of Rs 8,000 crore (which has been collected through this retro tax), but the intent of the government that it does not believe in retro taxation," he said.
Rules will be framed under the law giving a reasonable timeframe for the companies to come and give an undertaking to the government that they will not pursue the cases. They will also have to give an undertaking that they agree to forego the interest on amounts collected.
The 2012 legislation, commonly referred to as the retrospective tax law, was enacted after the Supreme Court in January that year rejected proceedings brought by tax authorities against Vodafone International Holdings BV for its failure to deduct withholding tax from $11.1 billion paid to Hutchison Telecommunications in 2007 for buying out its 67 per cent stake in a wholly-owned Cayman Island incorporated subsidiary that indirectly held interests in Vodafone India Ltd.
The Finance Act 2012, which amended various provisions of the Income Tax Act, 1961 with retrospective effect, contained provisions intended to tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as Vodafone's transaction with Hutchison in 2007 or the internal reorganisation of the India business that Cairn Energy did in 2006-07 before listing it on local bourses.
Using that law, tax authorities in January 2013 slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest. This was in February 2016 updated to Rs 22,100 crore plus interest.
They slapped an assessment of Rs 10,247 crore on Cairn Energy in January 2014, which after including penalties came to Rs 20,495 crore.
A similar demand was also slapped on Vedanta Ltd, which bought Cairn's India business in 2011.
Both Cairn and Vodafone challenged the demand under bilateral investment treaties India has with UK and the Netherlands, and they both got favourable rulings recently.
Vedanta, from whom no tax recovery was made, too initiated arbitration to challenge the tax demand under the India-UK treaty. That arbitration award has not come yet.
Sitharaman's bill stated that income-tax demand had been raised in 17 cases and the retro tax was criticised for being against the principle of tax certainty and damaged India's reputation as an attractive destination. It was a sore point for potential investors.
"The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President)," it said.
It further proposed that the tax on indirect transfer of Indian assets made before May 28, 2012, shall be nullified on furnishing of undertaking for withdrawal of pending litigation.