Retrospective tax

Adverse decisions by international arbitration tribunals in the cases of UK telecom major Vodafone Group and oil producer Cairn Energy have prompted the Union government to table the Taxation Laws (Amendment) Bill in the Lok Sabha, seeking to nullify the retrospective tax provisions introduced in 2012. It’s a welcome move that was long overdue, and what proved to be the proverbial last straw was a French court’s order allowing Cairn Energy to seize 20 Indian Government assets in central Paris, including luxury flats meant for the stay of visiting VIPs, to recover a part of $1.72 billion (arbitration award plus costs and interest) owed by New Delhi.

Though the NDA government has been reiterating its opposition to retrospective taxation ever since it came to power in 2014, it kept banking on arbitration for too long, hoping against hope for favourable judgments to resolve the ‘legacy disputes’. On December 21, 2020, an arbitration tribunal at The Hague pronounced its award in favour of Cairn Energy Plc and Cairn UK Holdings Ltd. In another setback for the Indian government last year, the Permanent Court of Arbitration at The Hague ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on Vodafone for a 2007 deal was in breach of the guarantee of equitable treatment.

The protracted litigation has not only been expensive and time-consuming but has also dented India’s reputation as an investor-friendly destination. It is hoped that the new legislation will usher in a fair and predictable tax regime and boost investors’ confidence, which is a prerequisite for bringing the country’s Covid-battered economy back on track. India is ranked a middling 63rd on the Ease of Doing Business index, way behind other Asian nations such as Singapore, South Korea, Thailand, UAE, Japan and China. Foreign investors have many options, and they won’t prefer countries where they are likely to face uncertainty and intimidation on the taxation front. The challenge for India will be to optimally use the new law to attract big-ticket investments. 

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