Retrospective Tax: Finance Minister, Nirmala Sitharaman, on 5th August 2021, introduced a bill in Parliament to nullify the provisions of the Income Tax Act.
- This bill has put an end to contentious retrospective tax law which has hit the confidence of foreign investors like Vodafone and Cairn.
- The government has also proposed to refund the amount paid in litigation by companies without any interest thereon.
- According to Finance Secretary T V Somanathan, the total amount involved for all cases is about Rs 8,100 crore, of which about Rs 7,900 crore is related to the Cairn dispute.
Key Points about the bill:
- The Bill would withdraw the retrospective amendments to the Income Tax Act of 1961 that had raised demands on Vodafone, Cairn, and some others.
- This bill sought to attract foreign investments.
- As per the bill, no tax demand would be raised in the future based on the retrospective amendment for any indirect transfer of Indian assets, in case the transaction was undertaken before May 28, 2012.
The Vodafone Case:
- The Vodafone case relates dates back to the telco acquiring Indian assets of Hutchison Essar in 2007.
- The demand amounted to Rs 22,100 crore.
- The government had filed an appeal against the verdict in Singapore.
- India had also lost a case in an international arbitral tribunal at The Hague last year against taxing Cairn Energy Plc and Cairn UK Holdings Ltd on alleged capital gains the company made when in 2006.
- The Tribunal had asked India to pay Cairn an amount of $1232.8 million-plus interest as well as $22.38 million towards arbitration and legal costs.
- India’s imposition of tax liability on Vodafone breached an investment treaty between India and the Netherlands, ruled an international arbitration tribunal in 2020.
- Cairn was awarded damages of more than $1.2 billion in December by the Permanent Court of Arbitration at The Hague in the retro tax case.
- A French tribunal last month ordered a freeze on some 20 properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn.
What is Retrospective Taxation?
- 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.
- It taxes a transaction that took place prior to the law being framed.
- Retrospective Taxation allows any country to pass a rule on taxing certain products, items, or services. It charges companies from time behind the date on which any law is passed.
- This route is used by countries to correct any anomalies in their taxation policies.
- Countries like the USA, UK, Canada, Italy, Netherlands, Belgium, and Australia and have retrospectively taxed companies.