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Axe finally falls on much-hated retro tax

The Bill seeks to withdraw all tax demands on capital gains made from indirect transfer of Indian assets prior to May 28, 2012.

Published: 06th August 2021 07:11 AM  |   Last Updated: 06th August 2021 07:11 AM   |  A+A-

nirmala sitharaman

Union Finance Minister Nirmala Sitharaman (File Photo | PTI)

Express News Service

NEW DELHI:  Finding itself in a corner over tax litigations with Cairn Energy and Vodafone Plc, the Centre has decided to scrap the controversial retrospective tax demands. On Thursday, Finance Minister Nirmala Sitharaman introduced The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha. The Bill seeks to withdraw all tax demands on capital gains made from indirect transfer of Indian assets prior to May 28, 2012. The Centre will refund such taxes it already collected but no interest will be paid. 

This comes with a rider that the taxpayers will have to drop all pending litigations against the Centre and promise not to press claims for damages.  This is a major step, given that the government is locked in litigation with Vodafone and Cairn – with both getting favourable orders from an international arbitration court. The arbitration tribunal in The Hague awarded $1.2 billion (plus interest and cost) to Cairn. Total payable amount is $1.7 billion as of April 2021.

To recover this, Cairn Energy has filed cases in the US, the UK, Canada, Singapore, France and Netherlands to seize India’s assets if New Delhi did not abide by the tribunal’s decision. In early July, a French court allowed Cairn to freeze at least 20 Indian properties in Paris worth $20 million. 

Terming the retrospective law a ‘sore point’ that was putting off potential investors, the government stated, “The country today stands at a juncture when quick recovery of the economy after the Covid-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.”

Vodafone was not immediately available for comments, while Cairn Energy said in a London Stock Exchange filing that it is monitoring the situation and would provide further update in due course. 
The move will mean that the Indian government will have to refund around Rs 8,000 crore collected as  retro tax thus far. Of this, Rs 7,000 crore will have to be paid to Cairn India alone. However, Supreme Court lawyer Arvind Datar, who has represented Cairn Energy in the retrospective tax dispute case, said he does not know if Cairn would agree to the conditions laid down for settlement. 

The controversial bill was introduced in 2012 by then finance minister Pranab Mukherjee, after the Supreme Court had ruled that Vodafone couldn’t be taxed for its 2007 purchase of a 67% stake in Hutchison for $11 billion.  Later, the tax was invoked against Cairn for a corporate reorganisation done in 2006-07 and its assets were frozen. 

WHAT’S RETRO TAX?

In 2012, Indian government under then finance minister Pranab Mukherjee retrospectively amended Income-tax Act to raise tax demands on income from sale or transfer of an asset situated in India, even if the transaction takes place outside the country 

The amendment was to bypass an adverse Supreme Court ruling that prevented the I-T department’s move to levy capital gains on an overseas share sale transaction involving Vodafone Plc

Sizing it up

Govt had sent notices to 17 firms to cough up Rs 1.10 lakh cr in back taxes 

Vodafone got a tax demand of  Rs 22,100 cr plus interest

Cairn Energy was told to pay a total of Rs 20,495 cr

Give & Take

  • Govt will return all retro tax it  collected thus far without interest
  • Companies will have to withdraw all the cases they have filed against the govt over retro tax
  • Firms will also have to forego the interest on amounts collected by the govt


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