Govt to amend Income Tax Act to nullify retrospective tax demands

After Vodafone and Cairn setbacks, Union government on Thursday moved to end retrospective tax by amending Income Tax Act.

A Bill has been introduced in Lok Sabha for amending the Income Tax Act to dilute the dreaded retrospective changes made in Finance Act, 2012.

The government proposed that no retro tax demand will be made if transaction is done before May 28, 2012

“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 government. "In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment," government further said.

In 2012, after the Supreme Court ruled that the Vodafone Group’s interpretation of the Income-Tax Act of 1961 was correct, and that it did not have to pay any taxes on the stake purchase, then Finance Minister Pranab Mukherjee circumvented the ruling by proposing an amendment to the Finance Act, which gave the I-T Department power to retrospectively tax such deals.

The Act was passed by Parliament that year, and the onus of paying the tax fell back on Vodafone.

The same Act was used to tax Cairn Energy Plc’s transfer of shares as well.

Cairn, a Scottish firm, invested in the oil and gas sector in India in 1994 and a decade later it made a huge oil discovery in Rajasthan. In 2006 it listed its Indian assets on the BSE. Five years after that the government passed a retroactive tax law and billed Cairn Rs 10,247 crore plus interest and penalty for the reorganisation tied to the flotation.

The state then expropriated and liquidated Cairn's remaining shares in the Indian entity, seized dividends and withheld tax refunds to recover a part of the demand.

Cairn challenged the move before an arbitration tribunal in The Hague, which in December awarded it $1.2 billion (over Rs 8,800 crore) plus costs and interest, which totals $1.725 million (Rs 12,600 crore) as of December 2020.

The company, which previously said the ruling was binding and enforceable under international treaty law, has been since then courting Indian government officials to get the money paid. But the government has not agreed to pay.