A brief history of India’s retrospective tax law that would finally be upturned for good

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A brief history of India’s retrospective tax law that would finally be upturned for good
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  • On August 5, Finance Minister Nirmala Sitharaman tabled the Taxation Laws Amendment Bill in the Parliament.
  • The retrospective tax rule was passed in May 2012 wherein the government asked companies to pay taxes on indirect transfers of Indian assets.
  • Companies like Vodafone and Cairn may get some relief after the long tax dispute over the years.
On Thursday, August 5, the Indian government proposed to withdraw all tax demands under the retrospective law brought in 2012, on companies like Cairn Energy and Vodafone, and said it will refund the money collected to enforce such levies.

The retrospective tax rule was an amendment to the Income Tax Act, 1961, which received the President’s assent in May 2012, allowing the government to ask companies to pay taxes on mergers and acquisitions (M&As) that happened before that date.

"Any existing demands are also proposed to be nullified subject to withdrawal of pending litigation and the taxpayer agreeing to forego interest, costs and damages. Refunds too shall be handed out without interest. This is indeed a very pragmatic step by the Government and should help it contain the widespread litigation in cases similar to Vodafone and Cairn. A worthy battle to lose.”

Kumarmanglam Vijay, Partner, J Sagar Associates

Initiation of law

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The retrospective tax provision was introduced by the United Progressive Alliance (UPA) government in 2012.

This goes back to the time when UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion to which the Indian government raised a demand of ₹7,990 crore in capital gains saying the company should have deducted the tax at source before making a payment to Hutchison. The company took the matter to the Supreme Court which eventually turned in favour of Vodafone.

One such indirect transfer was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.

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September 2007: Income tax department slaps Vodafone International BV with a tax demand of $2 billion.

January 2012: Supreme Court sets aside I-T department's claim, saying transactions carried out in India cannot be taxed.

February 2012: The then Finance Minister Pranab Mukherjee (1935-2020) brought in a bill, which was eventually passed by the Parliament, that would force companies like Cairn and Vodafone to be liable to pay taxes based on retrospective changes to the law.

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I-T department slaps ₹3,100 crore tax notice on Vodafone India.

September 2013: Bombay HC dismisses Vodafone's petition and refers it back to the tax tribunal.

December 2013: Income Tax Appellate Tribunal asks Vodafone to deposit ₹200 crore.

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January 2014: Income tax department issues notice to Cairn raising a preliminary assessment of ₹10,247 crore tax liability for its holding uncer Cairn Energy.

March 2015: The IT department demanded ₹24,000 crore as Cairn UK made a capital gain of ₹24,503 crore in the internal reorganisation.

September 2020: Vodafone won the international arbitration case.

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December 2020: Cairn and Vodafone filed lawsuits in international courts against the retrospective tax, which India lost.

March 2021: Government challenged an international arbitration tribunal asking it to return $1.2 billion to UK’s Cairn Energy

August 2021: Finance Minister Nirmala Sitharaman brings in The Taxation Laws Amendment Bill to the Parliament to do away with the retrospective tax demand on companies for good.

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SEE ALSO: Indian government brings in a bill to bury the infamous retrospective tax that haunted Cairn and Vodafone for nearly a decade

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