It was a tax move that was seen as being hurtful to India’s prospects as an investment destination and was decried in the country and outside. But the government has now moved an amendment to the so-called retrospective tax provision to close out pending cases involving the likes of telecom giant Vodafone and energy firm Cairn with corporates and experts hailing the decision. Here’s all you need to know.
What Is The Retrospective Tax Law?
The roots of this saga date back to 2007, when Vodafone bought over a majority stake in the telecom operations of Hutch in India for $11.1 billion. While the deal involved the changing of hands of Indian operations of Hutch, the companies party to it were registered outside India and all the paperwork and financial transactions, too, were done outside the country.
But the Indian government ruled that Vodafone was liable to pay capital gains tax to it as the deal involved the transfer of assets located in India. Importantly, there was no rule in the Indian statutes then that allowed such taxation. Vodafone challenged this claim and the case went to Supreme Court, which ruled in 2012 that there was no tax liability on Vodafone’s part to Indian authorities.
That should have been the end of the matter but what followed was a manoeuvre by the then UPA government at the Centre and its Finance Minister the late Pranab Mukherjee that opened a Pandora’s box of troubles for certain corporates, which would eventually also engulf the Indian government. In 2012, Parliament amended the Finance Act to enable the taxman to impose tax claims retrospectively for deals executed after 1962 which involved transfer of shares in a foreign entity whose assets were located in India. The target, of course, was the Vodafone deal. Very soon, tax claims were also raised on Cairn Energy.
How Did The Companies React?
The changes to the Finance Act allowed India to reimpose its tax demand on Vodafone. Tax authorities had slapped a tax bill of Rs 7,990 crore on Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison. By 2016, reports say, the bill had risen to Rs 22,100 crore after adding interest and penalty.
The demand on Cairn was for Rs 10,247 crore in back taxes over its move, beginning in 2006, to bring its Indian assets under a single holding company called Cairn India Ltd. For that to happen, Cairn UK had to transfer shares to Cairn India Ltd. At that time, the company had paid no tax on the entire process.
A few years later, when Cairn India Ltd floated an Initial Public Offering (IPO) to divest about 30 per cent of its ownership of the company, mining conglomerate Vedanta picked up most of the shares. However, Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta as Indian officials held that the company had to first clear the tax liability arising from the transfer of its shares to its Indian entity.
So, in 2014, it made a tax demand of Rs 10,247 crore against Cairn India, although the company had in 2011 been acquired by Vedanta with the 9.8 per cent outstanding shares still held by its UK-based parent. Indian authorities subsequently seized these shares in 2014 along with the dividends Vedanta owed to Cairn Energy for its holdings in the Indian firm.
That prompted Cairn UK to move the Permanent Court of Arbitration at The Hague, Netherlands, saying that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it. The treaty provides protection against arbitrary decisions by laying down that India would treat investment from UK in a “fair and equitable" manner.
Vodafone, too, had sought arbitration before the Permanent Court of Arbitration, citing the “fair and equitable" treatment clause in the India-Netherlands BIT — as its Dutch arm was involved in the Hutch deal — and the India-UK BIT.
How Did The Court Of Arbitration Rule In These Cases?
In September last year, the Hague court ruled in favour of Vodafone, quashing India’s tax claim after holding that it violated the “equitable and fair treatment standard" under the bilateral investment treaty. In a statement at the time, the company had said the court had ruled that “any attempt by India to enforce the tax demand would be a violation of India’s international law obligations". It also pointed out that the court had rendered an unanimous decision, which means the arbitrator appointed by India, too, backed the verdict.
Government sources said that while there was no damages or refund in the Vodafone case, it had been asked to compensate the company for its legal expenses.
Then, in December last year, the same court ruled, unanimously again, that the tax claim on Cairn, too, was unfair and awarded the company $1.4 billion in damages. However, after India refused to pay the compensation, Cairn launched recovery proceedings across countries as part of which a French court ordered the freezing of some Indian assets in Paris.
The Indian government challenged both awards even as financial experts were reported as saying that the move would discourage foreign investors from coming to India and that the Centre should look to resolve the case at the earliest. The amendments now mooted are designed to do just that.
What Has Happened Now?
The Taxation Laws (Amendment) Bill, 2021, introduced by the Union Finance Ministry offers to drop tax claims against companies on deals before May 2012 that involve indirect transfer of Indian assets would be “on fulfilment of specified conditions", including the withdrawal of pending litigation and the assurance that no claim for damages would be filed. Further, it has said it would also refund any payments realised from these companies though without offering of any interest on it.
The government reportedly told Parliament that at least 17 entities stand to benefit from the proposed tax amendment and that the refund payable by it amounted to about Rs 8,100 crore, of which Rs 7,900 crore had come from Cairn alone.
Rohinton Sidhwa, Partner, Deloitte India, said the amendments represented “a bold move that addresses the concerns of many foreign investors". He added that it “puts to an end many of the past arbitration cases pending, which have created great embarrassment for India in international circles".