WITHDRAWAL OF RETROSPECTIVE TAX LAW

It is known to all that on August 5th 2021 Indian government has withdrawn all the taxes under the Retrospective Tax Law. But what Exactly was this law and why was there a need to withdraw it?

Retrospective, the name itself means “in the past”. The retrospective law allows the government to impose taxes on transactions that have happened even before the law came in to the existence. Governments usually do this to rectify any deviations or loopholes in the taxation policies that the companies must have used for their benefit. So, retrospective taxes can make a correction by charging tax under the existing policies. Many countries such as US, UK, Australia, Netherlands, Belgium, Canada, and Italy have the similar laws.

The retrospective tax provision was introduced by the United Progressive Alliance (UPA) government in 2012. It was an amendment to the Income Tax Act of 1961. But this law resulted in various disputes between the government of India and other major companies such as Vodafone telecommunications and cairn energy.

After the implementation of this law, government was able to charge tax of Rs 7,990 crores (plus Interest) from Vodafone. This tax was a long-term capital gain tax when Vodafone acquired 67% stake in Hutchison in 2007. Government claimed that Vodafone should have deducted Tax at source before making the payment to Hutchison.

In 2015, government also imposed a tax liability of USD 1.6 billion on Cairn India Ltd for its failure to deduct withholding tax on alleged capital gains arising during a restructuring transaction in 2006 in the hands of its parent Cairn UK Holdings Ltd.

Both the companies challenged this rule under bilateral investment treaty that India has signed with UK and The Netherlands. The decision ended up being in the favour of Vodafone and cairn.

Now India has to repay the total of Rs 8,100 crores. Out of this, 7,900 crores is related solely with the cairn dispute. The others such as Vodafone and WNS capital will also get their share.

It was considered that such law was damaging the reputation of India as an attractive destination for investments. Apart from this, the law was also creating uncertainty in the minds of the consumers. It has spooked the minds of investors for years now. So, especially after the decision in the favour of cairn energy, government agreed to refund the principal amount of other such companies as well.

This change has been considered a step in right direction by many economists. They believe that the withdrawal of retrospective tax is a green signal for the foreign investors and is sure to boost employment and development of economy.

Thank you.

Regards,

Raveena Batreja,

Kautilya,

IBS Mumbai.