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Why in news?

• The Taxation Laws (Amendment) Bill, 2021, was recently introduced in Parliament by the government. By amending the Income Tax (IT) Act of 1961 and the Finance Act of 2012, the bill seeks to repeal the contentious retrospective tax law.

History of retrospective taxation

• The roots of this law date back to 2007, when Vodafone bought over a majority stake in the telecom operations of Hutch in India for $11.1 billion.
  • After Vodafone won a case in the Supreme Court against the I-T department’s demand for 11,000 crores in tax dues, the retrospective tax law was enacted through the Finance Act, 2012.
• This legislation became necessary after the Supreme Court ruled in 2012 that gains arising from the indirect transfer of Indian assets were not taxable under existing laws.
• When Cairn exited Cairn India Ltd in January 2014, the retrospective tax provisions were also applied to it. The initial request was for Rs. 10,570 crores.

What is retrospective taxation?

• The meaning of the word ‘retrospective’ is ‘looking backward’. It relates to thinking about the past, ‘looking back over the past’, etc. In terms of taxation, retrospective tax means giving effect to the amendment in the present law before the date on which the changes were brought in.
• Retrospective taxation allows a country to enact legislation that taxes specific products, items, or services. This taxation is applied to companies from a previous date, i.e. before the law is enacted.
• Typically, countries use retrospective taxation to correct anomalies in their taxation policies that have previously allowed companies to exploit such loopholes. However, this retrospective tax penalizes businesses that knowingly or unknowingly interpreted the tax rules incorrectly.
• Many other countries, including the United States, the United Kingdom, the Netherlands, Canada, Belgium, Australia, and Italy, have previously taxed corporations retroactively.

Implications of the Retrospective taxation laws 

• Uncertainty in economic policy-Retrospective amendments undermine the principle of tax certainty and harm India’s reputation as a desirable destination.
  • Parthasarthy Shome committee,2012 – The Committee concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases like correct anomalies in the statute, to apply to matters that are genuinely clarificatory and to “protect” the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without economic substance.
• Humiliations-Several humiliations have recently been inflicted on India in international arbitration while challenging tax demands made under the retrospective clause.
• Some previous Rulings against India
  • Vodafone and Cairn Plc.-2020- the government was dealt two adverse rulings in cases involving Vodafone and Cairn Plc.
    • An international arbitration tribunal ruled last year that India’s imposition of tax liability on Vodafone violated an investment treaty between India and the Netherlands.
    • In the retro tax case, Cairn was awarded more than $1.2 billion in damages by the Permanent Court of Arbitration in The Hague in December.
  • Devas Multimed-which won a contract cancellation case against Antrix Corporation (a subsidiary of the Indian Space Research Organization).
    • As Devas later argued in a US court, nine arbitrators and three international tribunals had ruled that the termination of the Devas-Antrix agreement was illegal. Each of these cases involves a total of 160 million dollars.
    • Following Cairn’s lawsuit in the United States, Devas Multimedia is requesting a $1.3 billion award to seize Air India’s assets abroad.
• Contradictory to the vision of combating tax terrorism- It contradicts the government’s determination to combat “tax terrorism” and undermines the “Make in India” initiative.
  • Tax Terrorism essentially means the undue exercise of power by tax authorities to levy taxes using legal or extra-legal means.
• Hurt foreign investment– Changing the rules after you’ve begun doing business discourages the business environment and potential investments.
  • Damodaran Committee, 2013- The Damodaran committee recommended the scrapping of retrospective taxation as early as possible. Scrapping of ‘retrospective taxation’ as a chief measure to make India an attractive destination to do business.

Recommendations of the Committees on Retrospective taxation

Objectives of the amendment

• The amendment also strikes a balance between two opposing goals.
  • The government’s policy of having a predictable tax regime.
  • India is concerned about the adjudication of Indian tax law by foreign tribunals.
• This is an attempt to resolve the dispute through the sovereign means of Indian law rather than through arbitration.

Conditions one has to meet to avoid the retrospective taxation

• The condition includes the withdrawal of pending litigation and the assurance that no claim for damages would be filed.
• As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped, and any taxes already collected shall be repaid, albeit without interest.
• To be eligible, the concerned taxpayers would have to drop all pending cases against the government and promise not to make any demands for damages or costs.

Salient provisions of the Taxation Laws (Amendment) Bill, 2021

• Tax claims made on offshore transactions executed before May 28, 2012, when the amendment to the Income Tax Act was introduced, will be null and void, according to the new bill.
• The government has also proposed that companies be refunded the amount paid in litigation without interest.
• The government’s demand will be null and void unless certain conditions are met, such as the withdrawal of pending litigation, companies certifying that no claim for cost, damages, interest, or other compensation will be made
• According to government sources, the move was intended to send a positive message to the investor community.

Implications of the move

• No tax demand will be raised in the future based on the aforementioned retrospective amendment for any indirect transfer of Indian assets if the transaction was completed before May 28, 2012. (i.e., the date on which the Finance Bill, 2012, received the assent of the President).
• Demands for indirect transfer of Indian assets made before May 28, 2012, will be null and void unless certain conditions are met.
• It is also proposed that the amount paid in these cases be refunded without interest.

Significance of the move

• Preservation of sovereign right to taxation-While preserving the “sovereign right to taxation,” the amendment also gives businesses a reasonable opportunity to resolve the issue.
• More investment-It is a positive step for foreign investors, and it will directly result in more foreign investment.
• Faster economic growth-The need of the hour is for the economy to recover quickly. Foreign investment would play an important role in promoting faster economic growth and employment in this direction.
• Non-adversarial taxation-It is consistent with the government’s pledge to create a non-adversarial tax environment.
• Opportunity for the affected taxpayers-It is an excellent opportunity for affected taxpayers to resolve all previous disputes and avoid future litigation costs.
• Will end the litigation of various companies– Apart from addressing criticism about uncertainty, the move is expected to end litigation with 17 companies, including Vodafone and Cairn.

Conclusion

• Tax terrorism was coined to describe retrospective taxation.Such retroactive amendments, it is argued, violate the principle of tax certainty and harm India’s reputation as a desirable destination.Apart from putting an end to taxation, this could help restore India’s reputation as a fair and predictable regime.
• The government must now be generous in its settlements with the companies that have been harmed by an action that it admits has been detrimental to India’s development.

Mains model Question

• What do you mean by Retrospective Taxation? Centre recently amended Retrospective Taxations laws Discuss the implications and significance of the move?

References

• https://www.thehindu.com/business/centre-moves-to-redact-retrospective-tax-law/article35745993.ece
• https://indianexpress.com/article/india/retro-tax-withdrawal-bill-lok-sabha-cairn-vodafone-7440105/
• https://indianexpress.com/article/business/kumar-mangalam-birla-steps-down-as-non-executive-chairman-of-vodafone-idea-7438469/