Gracefully refund illegal retro tax levies
Red tapism is a bane this country can’t seem to get rid of. Often, the rules we make to smoothen a thorny issue become the stumbling block. After the pushback against the government’s retro taxation on Cairn Energy, Vodafone PLC and others, the Union government saw the light and reversed the tax rule by enacting the Taxation Laws (Amendment) Act, 2021.
However, the tax department has now framed draft rules that threaten an amicable settlement. Among these is the department’s demand that the companies must give an irrevocable undertaking withdrawing all legal cases against the government, and undertake not to pursue any cases in future. The companies have pointed out that the rules put the onus of settlement on the companies. For instance, how do they settle frivolous and third-party litigation?
A flawed tax rule had been used over a decade to impose a retrospective capital gains tax cumulatively amounting to Rs 1.1 lakh crore on 17 entities, including Rs 10,247 crore on Cairn and Rs 22,100 crore on Vodafone. Cairn and Vodafone had challenged these before international tribunals and won relief. When the government refused to relent, Cairn Energy had begun proceedings to seize Indian government assets abroad and even succeeded in a few cases. Seeing the writing on the wall, the government relented. Unfortunately, it was not the merit of the case but the fear of a backlash from the international business community that led to the government’s decision.
Given the history, the onus of settlement is on the government. It was not the companies that brought in a flawed tax rule that allowed the I-T department to go back 50 years and levy capital gains on the companies’ Indian assets wherever ownership had changed hands overseas. The international tribunals have also pointed out that these were against the bilateral investment treaties India had signed with the UK and Netherlands. In these circumstances, it makes sense for the government to gracefully withdraw and make amends. Levies that courts in India and abroad have ruled to be illegal should be unilaterally returned without making the victims run another I-T Department gauntlet.