What is retrospective tax? Here's why govt's latest move brings relief to Cairn, Vodafone

Finance Minister Nirmala Sitharaman, on August 5, introduced Taxation Laws (Amendment) Bill, 2021 in Lok Sabha. The newly tabled law will do away with the contentious retrospective tax after more than nine years since its introduction. The retro tax introduced as part of the Finance Act 2012, imposed a tax on capital gains by companies like Cairn Energy Plc and Vodafone group of UK.

FM introduced Taxation Laws (Amendment) Bill, 2021 in LS

The latest move by the government will likely end the long-standing legal dispute of companies like Cairn Energy and Vodafone with the Centre. "The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May 2012,” Sitharaman said in a written statement along with the bill.

What is retrospective tax? What does its removal mean?

Earlier on May 28, 2012, the 2012 Finance Act was introduced, giving legal backing to the country's retrospective taxation. The retrospective tax law imposed a tax on companies' capital gains, causing a fallout with British firms like Cairn Energy Plc and Vodafone group. The bill was announced by the late Pranab Mukherjee during his tenure as the finance minister and was approved by then President Pratibha Patil. Now, the current government is planning to reverse this and do away with cases pending regarding the law in Indian courts. Many investors have already backed it as it supports the pleas of foreign investors.

Sitharaman, while explaining the bill, said that the demand raised for indirect transfer of Indian assets made before 28th May 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed.

Based on the latest development, companies like Vodafone, Cairn and others will have to sign undertaking against filing cases related to retrospective taxes against the government in the future, while withdrawing the current cases. The companies will also be disallowed to seek legal damages and recoup legal costs. Following the undertaking, the Centre will pay back the principle amount to the companies.

Centre's plan to do away with retrospective tax law

The Narendra Modi-led government was also under demand to repeal the retrospective tax. Following the rise to power in 2014, former Finance Minister Arun Jaitley assured stakeholders that the law would only pursue pending assessments. No new cases were filed in the matter. Later, FM Sitharaman had hinted at the amendment during a ‘major economic reform’. “However, retrospective taxation and consequent demand created in a few cases continue to be a sore point with potential investors,” she said.

“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,” the finance minister had added. The latest move by the Centre lends promise to companies like Vodafone idea and Cairn that their demand for the withdrawal of retrospective tax is heard.

IMAGE: PTI/ TWITTER