Introduction
In 2012, after the adversarial decision of Supreme Court decision in the case of Vodafone, Indian Government had introduced slew of retrospective amendments in the Income Tax Act. This led to severe criticism from the International community and investors and damaged India’s image as investment hub. It further augmented litigation and huge taxes were blocked.
Salient provision of the Taxation Laws (Amendment) Bill, 2021
In a historic development, the Indian Government on 04th August 2021 introduced a Bill in the Parliament to amend Explanation 5 to sec. 9 of the Income Tax Act, 1961 seeking to nullify a retrospective levy of tax on indirect transfer of shares of an Indian entity by a foreign entity which took place before 28th May, 2012. The Bill also provides that if taxes are already recovered, same shall also be refunded, however, without any interest.
To avail benefit of this amendment, assessees have to fulfil following special conditions –
A. Pending appeal before Courts will be withdrawn.
B. Pending Arbitration proceedings will be withdrawn.
C. Undertaking that no remedy under any law, treaty or under equity will be availed in relation to disputed amount.
As per the Statement of Objects and Reasons, main reasons cited for this amendment are –
1. To improve India’s damaged image and to provide tax certainty to foreign investors.
2. To attract foreign investment so to have boost in recovering economy from COVID-19 slowdown.
The present amendment is commendable step and a big policy shift. It is in line with incumbent Indian Government’s slogan of ‘Ease of Doing Business‘. This is a step in the right direction and will certainly strengthen the confidence of foreign investors.
Background for the Amendment
However, it is exciting to underscore the background which led to this huge step. As mentioned in the Statement of Object, the Indian Government has taken action invoking retrospective amendment against 17 assessees. Out of these 17 cases, arbitration under Bilateral Investment Protection Treaty (BIPT) with United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of taxpayer and against the Income Tax Department. In 2 cases, assessments are still pending due to stay granted by High Court.
It is also interesting to note that as per the Vodafone Arbitration award, the Indian government was directed to reimburse 60% of Vodafone’s legal costs and 50% of fees of arbitrator. Hence, the government’s liability is roughly estimated to be around Rs 75 crore.
Indian government has similarly lost an international arbitration case to Cairn Energy Plc over the retrospective levy of taxes, and has been asked to pay damages worth $1.2 billion (Rs 8,842 crore) to the UK firm.
Evaluation of these shows that Indian Government instead of achieving its purpose of revenue collection, is anticipating outflow of around 8,900 Crores in addition of returning of taxes collected along with interest. Further, the retrospective levy has greatly affected foreign investors sentiments and significantly hampered flow of investments in India.
Concluding Remarks
This is an extraordinary and wise move by the Indian Government whereby it is trying to achieve three goals in one shot (to speak in terms of football!) by (a) saving itself from paying additional costs of around Rs 8, 900 crores (b) avoiding payment of huge interest costs awarded in Arbitration awards despite the fact that they collected taxes invalidly and (c) off course instilling confidence in foreign investors that retrospective tax will not be levied thereby ensuring tax certainty and equitable treatment.
All in all, this move indicates Indian Government’s clever attempt to save its own skin by not paying interest, damages and legal costs as against sending positive message to foreign investors to invest in India by assuring tax certainty.
Reference –
https://www.business-standard.com/article/companies/india-challenges-vodafone-arbitration-award-plans-the-same-in-cairn-case-120122401064_1.html
Author Bio
OFFhand
The move undeniably deserves to be applauded as one in the right direction. However, in own perspective,- but well founded on ‘common sense thinking’,fail to appreciate why and how,-despite the reaction to the contrary from the limited professional, business and other circles (concerned or not) – be rightly acclaimed to be a ‘historical’ development as to provoke a wholesome ‘jubilation’/’celebration’ , as come to be noted !
If critically viewed, do not the stated reasons/objective behind the move equally and squarely apply so as to justify scrapping of the related IT Provisions , once for all, – that is, also prospectively ???!!!???
OVER To…>>>>
Thanks for article but you opinion is not required “Government’s cleaver attempt to save it’s own skin”
“Indian government has similarly lost an international arbitration case to Cairn Energy Plc over the retrospective levy of taxes, and has been asked to pay damages worth $1.2 billion (Rs 8,842 crore) to the UK firm.”
“All in all, this move indicates Indian Government’s clever attempt to save its own skin by not paying interest, damages and legal costs as against sending positive message to foreign investors to invest in India by assuring tax certainty.”
Both Paras contradicy qua Damages.
Sir,
Though due to Arbitration Award damages are payable by the Govt. , due to present Amendment, Cairn and Vodafone has to give up favorable Arbitration Award to take benefit of Amended provision. If at all they opt for this provision, no damages and interest will be paid by the Indian Govt. So, it is not contradictory.
Well written! Would have liked to know Govt. Claim Amounts on at least Vodafone and Cairn!
Sir, thank you for your suggestion.
Tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest was raised on Vodafone.
Tax demand on Cairn was of Rs 10,247 crore.