Context

With the government proposing to repeal the ‘retrospective tax’ amendment introduced in the Union Budget 2012-13, a 14-year-story has come to an end.

Background of retrospective tax

• In 2007 Vodafone acquired Hutchison Essar, the telecom company, for $11 billion. But the deal did not take place in India.
• Yet, Vodafone was slapped with a huge income tax demand in India.
• The Supreme Court rule in favour of Vodafone and said that the Indian authorities could not tax a deal executed in Cayman Islands.
• This verdict led to the 2012 amendment in the Income Tax Act, to the effect that if an Indian asset was held by a foreign company and an acquirer bought this holding company, such a transaction was deemed to be taxable in India because the underlying asset was located in India.
• More importantly, this change was made retrospectively from 1962.
• Now, the government has introduced The Taxation Laws (Amendment) Bill, 2021 to undo this insidious provision from the Finance Bill, 2012.
• The government will not raise tax demands in any such case if the transaction occurred before 28 May 2012.
• The tax on the indirect sale of assets located in India still stays on the statute books, but it is fully visible to and understood by any parties looking to enter into such a transaction.

Why repeal of retrospective taxation is a good move?

• Resolution of case the cases: This will potentially help resolve 17 cases in which income tax demand had been raised, including two high profile cases—Cairn and Vodafone.
• Visibility and stability: The government is putting to rest the concept of retrospective taxation and is also creating visibility and stability for the future.
• Predictability: The most important aspect of any tax regime is its predictability and this decision helps bring that.
• Honouring the rule of law: It also reiterates India’s commitment to honour the rule of law and treaties.
• Build confidence: Apart from the various reform measures and incentives being offered, the sanctity of contracts is a key factor that any investing entity will look at when deciding on expanding business operations in India.
• The government’s move would help build confidence and provide a fillip to Atmanirbhar Bharat.

Conclusion

As the post-covid recovery picks up, focus needs to be on the future rather than keeping a sword of uncertainty for the past dangling on potential investors. Such a decision needs political capital and ownership, which comes through strongly in this case.

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