Explainer: What is Retro Tax and who benefits from the latest policy?

Source :Sify
Author :Finance Desk
Last Updated: Sun, Aug 8th, 2021, 13:00:53hrs
  • Facebook-icon
  • Twitter-icon
  • Whatsapp-icon
  • Linkedin-icon
Court-hammer-gavel-1200-sifydotcom

Former Finance Minister Arun Jaitley who had reckoned the decision to tax British Telecom major Vodafone a Retrospective Tax as an erroneous one would be a happy man.

This week, the Indian Government introduced a bill in the Parliament that seeks to do away with the Retrospective Tax.

For those unaware, the Retrospective Tax came into limelight during the tenure of the UPA government under former Prime Minister Manmohan Singh.

Retrospective Tax was announced as a policy by former FM Pranab Mukherjee. With this policy, the government could earn a revenue from Capital Gains Tax on the sale of shares in foreign entities and specifically those that involved assets in India.

Foreign entities such as Cairn and Vodafone which had entered into stake deals had much to lose. In the case of the Hutchison-Vodafone deal, there was the angle of the Tax Deduction at Source (TDS) under the Income Tax (IT) Act.

Vodafone approached the Supreme Court seeking which quashed the government's contention in January 2012. However, the government amended the act as retrospectively and put the liability back on the telecom operator. Slapped with a retrospective tax, Vodafone threatened that it would seek relief from an international arbitration tribunal. Vodafone received an order in its favour and the relief amount was estimated at Rs 22,100 crores.

Another British company, the oil and gas firm Cairn Energy too sought a relief of $ 1.2 billion. The case against India's retrospective tax was heard by the international arbitration court in Hague. The entities involved the UK major Cairn and the Vedanta Group.

The latest bill presented by Finance Minister Nirmala Sitharaman in the Parliament calls the issue of taxability of gains arising from transfer of assets located in India through transfer of shares as a "subject matter of protracted litigation."

There have been at least 17 such cases against the provisions of the Retrospective Tax in the Finance Act, 2012. The Bill says, ". Out of the said seventeen cases, arbitration under Bilateral Investment Protection Treaty 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."

The bill introduced in Parliament said, "It is argued that such retrospective amendments militate against the principle of tax certainty and damage India's reputation as an attractive destination. In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country."

"However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors," it adds

The Taxation Laws (Amendment) Bill introduced in Parliament has offered to drop tax claims on deals prior to March 2012 subsequent to fulfillment of certain conditions. These conditions include withdrawal of litigations and assurance that there would be no further claims to damages filed by the companies.

For those keen to read the bill, here is the PDF document as made available by the official website of the Lok Sabha of India. 

  • Facebook-icon
  • Twitter-icon
  • Whatsapp-icon
  • Linkedin-icon