Good News for Global Investors: Government reverses inpopular Retro Tax Policy of 2012

In a welcome move for the global investor community, the Centre has proposed to withdraw the infamous Retrospective Tax Law, 2012 which has hounded companies including Vodafone and Cairn Energy with billions of dollars of tax demands till date.

The freshly introduced bill would settle international disputes running into billions of dollars by reversing the controversial Retro Tax Law to do away with demands for past payments. It says that no tax demand shall be raised in the 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. The bill also proposes to refund the amount paid in these cases without any interest thereon.

The move has been welcomed by the investor community, with many calling it a long-overdue step towards development. “It is a clear signal from India to the global investor that India’s 2012 experiment with retrospective tax legislation around indirect investments into downstream assets in India is now conclusively at an end. It augurs well for a new era of tax certainty”, said Fereshte Sethna, Vodafone Lawyer & Senior Partner, DMD & Associates.

This comes after India lost international arbitration with Cairn, and just ahead of a similar arbitration ruling in Vodafone case over a similar demand. It is now expected to open the doors of resolution of long-pending litigation and appears to be the government’s way of resolving the issue with such companies.

What is the Retro Tax Bill?

The Retrospective Tax law was introduced in 2012 by the then Finance Minister Pranab Mukherjee under the Congress-led Government to claim tax from international companies which acquired assets of Indian firms.

According to it, gains arising from the sale of shares of a foreign company will be taxable in India if such shares, directly or indirectly, derive their value substantially from assets located in India.

India had been caught in numerous cases against companies over retrospective tax claims. While the controversial retrospective law was introduced by the previous Congress-led UPA government, but the tax cases that were filed by it were pursued by the BJP government.

Earlier this week, Vodafone promoter Kumar Mangalam Birla had written to the government asking that it take over his Aditya Birla’s 27% stake in the debt-saddled telecom. After Mr. Birla resigned as non-executive chairman of Vodafone on Wednesday, shares fell to their lowest in over a year.

An international arbitration tribunal in The Hague had last year ruled that India’s $2 billion tax claim on Vodafone was incorrect and that it breached an investment treaty between India and the Netherlands. 

Cairn, which has oil and gas operations in India, was awarded damages of more than $1.2 billion in December by the Permanent Court of Arbitration at The Hague after a lengthy tussle with the Indian government. 

In another instance, Cairn Energy had also sued Air India in a US court as part of its efforts to enforce the $1.2 billion award that it had won in international arbitration. The company said that Air India should be made liable for the government’s dues to it.

Now, however, after 9 long years, it is a weight off the shoulders of India and is a highly positive signal for foreign investors. The step would greatly improve India’s hampered investment image and is expected to help the country attract record amounts of FDI (Foreign Direct Investments).