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Retro Tax Rollback: Will it help India to emerge as favourable foreign investment destination?

The infamous retrospective tax amendment was first introduced in Budget 2012

The infamous retrospective tax amendment was first introduced in Budget 2012

With this reversal, the Centre has paved the way for companies, to withdraw litigation in Indian and international courts, with the assurance from the government that its demand for retrospective tax will also be withdrawn

Acknowledging the current situation of the economy and the need for a quick recovery and also that foreign investment plays an important role in boosting economic growth and employment, the Finance Minister has proposed to abolish the retrospective indirect transfer tax.

The FM introduced a Bill in the Parliament (Lok Sabha) on Thursday, August 5, to modify a law that has been there for almost a decade and which had caused anxiety to foreign investors.

The infamous retrospective tax amendment was first introduced in Budget 2012, dampening the foreign investment climate and starting a saga of domestic and international litigation and arbitration including MNCs such as a UK telecom major and a UK energy company, in some cases involving legal setbacks for the government.

With the Bill, it is now proposed that no tax demand would be raised in the future on the basis of retrospective amendment for any indirect transfer of Indian assets, if the transaction was undertaken before May 28, 2012, the date on which the Finance Bill, 2012, received the assent of the President.

The Bill proposes to nullify all orders passed against taxpayers raising tax demands and if any amount was paid, the same would be refundable provided they do not pursue further course of litigation in India or outside, in arbitration, mediation, etc, and withdraw such litigation. No interest, however, would be payable by the government on such refunds.

Trigger for Introducing Retro Tax Law

It may be recalled that a retrospective tax Bill which included tax, penalties and interest, was originally imposed by Indian revenue authorities over the UK telecom giant’s acquisition of the assets of an Indian telecom operator in 2007.

In 2012, the Indian Supreme Court had ruled that the tax department had no jurisdiction to impose obligations on the UK telecom major for a transfer of shares of a foreign company between two non-residents. Then came the sudden twist which reversed the course of the tax policy and took global investors by a storm.

The government went ahead and introduced retrospective amendments to the Income tax law, neutralising the apex court’s decision. The amendment impacted several entities that were involved in similar cross-border transactions.

Losing battles

The Indian government has been facing a long-standing legal dispute with the UK telecom major and the UK energy company over the retrospective tax imposed on them.

-An international arbitration tribunal last year ruled that India’s imposition of a tax liability on the UK telecom company breached the Bilateral Investment Treaty between India and the Netherlands. India’s claim worth Rs 22,100 crore of retro taxes and penalties was struck down. As per the award, the government has to reimburse the UK company 60% of its legal costs and half of the cost borne by it for appointing an arbitrator on the panel.

-In another case, the Permanent Court of Arbitration at the Hague in December 2020 ruled that the Indian Government should pay $ 1.2 billion to the UK energy company, plus interest and cost of $500 million against the retrospective tax charged on the company.

-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 the UK energy giant.

The Need for Proposed Amendment?

The FM has said in that the past few years, major reforms have been initiated creating a positive environment for investment in the country. “However, retrospective taxation and the consequent tax demand created in a few cases continue to be a sore point with potential investors,” she said.

In a bold but pragmatic move, the Government has attempted to nullify all retrospective taxes. Finance Secretary T V Somanathan said a total of Rs 8,100 crore was collected using the retrospective tax legislation. Of this, Rs 7,900 crore was from the UK energy company alone. This money will be repaid.

The government says that retrospective tax demand has been raised in seventeen cases. The Bill would nullify the demands raised, indicating a move to attract foreign investments and is expected to end their long-standing legal dispute with the Indian Government.

With this reversal, the Centre has paved the way for companies, to withdraw litigation in Indian and international courts, with the assurance from the government that its demand for retrospective tax will also be withdrawn.

It also puts to an end to many past arbitration cases pending which have been an embarrassment for India in international circles.

The question however remains whether taxpayers who have obtained favourable awards comprising of interest and damages as well, will consider this offer from the Indian Government.

Amit Pahwa is Director and Divya Shingari is Manager with Deloitte Haskins & Sells LLP. The views expressed in this article are those of the author and do not represent the stand of this publication.

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first published:August 14, 2021, 12:34 IST