Govt Introduces Bill To Repeal Retrospective Tax Demands; Cairn And Vodafone To Be Major Beneficiaries

Under the new Bill, in addition to withdrawing cases, companies like Vodafone, Cairn, and others will have to give an undertaking that they will not seek legal damages.

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Mumbai: In a significant relief to Cairn and Vodafone Plc., the Government on Thursday introduced the Taxation Laws (Amendment) Bill, 2021 in Lok Sabha on Thursday in a bid to bury the ghost of retrospective taxation, which hounded big foreign companies, including Vodafone and Cairn Energy, with billions of dollars of tax demands.

The Bill, introduced by Finance Minister Nirmala Sitharaman in the Lok Sabha, seeks to withdraw tax demands made on indirect transfers of Indian assets before May 28, 2012, that may benefit a dozen firms besides Vodafone and Cairn Energy, where the I-T department had raised tax demands based on these retrospective changes to tax laws.

The move comes after India lost both cases filed by Cairn and Vodafone in the international tribunal in the Netherlands. In both cases, the court ruled that India could no longer pursue the "alleged tax liability or any interest and or penalties."

Cairn has even taken aggressive steps to enforce its $1.7 billion award by seizing Indian assets abroad.

The Government also proposed that the money paid in these cases be refunded without interest. According to a government statement, a tax levied on the indirect transfer of Indian assets before May 2012 would be "nullified" if certain conditions were met, such as the withdrawal of pending litigation and an undertaking that no damages claims would be filed.

When asked for comments, Jaideep Ghosh, COO at Shardul Amarchand Mangaldas, told ABP News, "Indian telecom sector has been facing several challenges on the regulatory front and Vodafone Idea, especially, has been in a precarious situation. The Government's proposal to nullify retrospective tax ought to be a big boost to the company, assuming it meets the conditions. Overall, this is an important step for our economy promoting higher tax certainty and improved investment climate."

The retrospective tax rule was an amendment to the Income-Tax Act of 1961 that received then President Pratibha Patil's assent in May 2012, after being announced by then Finance Minister, the late Pranab Mukherjee, allowing the Government to demand taxes on mergers and acquisitions that occurred before that date.

"Bill proposes to amend IT Act, so as to provide that no tax demand shall be raised in future on basis of said retrospective amendment for any indirect transfer of Indian assets if transaction before 28th May, 2012," said a government statement.

Under the new Bill, in addition to withdrawing cases, companies like Vodafone, Cairn, and others will have to give an undertaking that they will not seek legal damages, recoup legal costs, or file cases against the Government for retrospective taxes in the future. Once such conditions are met, the Centre will repay the principal amount.

While the Government bears almost no liability in the Vodafone case, it is obligated to refund $1.2 billion to Cairn Energy for its shares sold, tax refunds withheld, and dividends confiscated.

Experts believe that the Union government's decision will help the country emerge as a favorable investment destination with low tax rates.

Besides, Vodafone and Cairn, India, have been subjected to a slew of arbitrations by investors ranging from Deutsche Telekom to Nissan Motor Co over issues ranging from retrospective taxation to payment disputes.

The Vodafone tax dispute involving Rs 12,000 crore in interest and Rs 7,900 crore in penalties began in 2007, following Vodafone's acquisition of Hutchison Whampoa's Indian mobile assets. The Indian Government insisted that Vodafone pay taxes on the acquisition, which the company refused.