What Compelled the Government To Amend Retrospective Tax Law After Nine Years?

International taxation expert, Dinesh Kanabar, tells what this landmark amendment could mean for India.

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The central government has tabled the bill to amend the Income Tax Act, 1961. This amendment gains importance as it will scrap the controversial retrospective tax provisions that were introduced in 2012.

The proposed bill states, '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 May 28, 2012.'

After long legal battles with global conglomerates like Cairn Energy and Vodafone, in the Supreme Court as well as international court, the government has finally proposed these amendments.

According to Revenue Secretary Tarun Bajaj, the total tax refund to be made by the government for settling disputes arising from the 2012 retrospective change is around ₹8,100 crore.

In an interview with The Quint, international taxation expert, Dinesh Kalabar, gives a sense of how to see this landmark amendment and what will it mean for India's prospects to attract global investors.

What compelled the government to amend the tax law?

The acquisition of Hutch by Vodafone became the key driver for the retrospective tax law of 2012. Then, the question arose whether the gain earned by Hutch due to this deal was taxable or not. Though the asset transferred were not Indian, its value was in India. So the government proposed Vodafone to cut tax on the payment made to Hutch. Since Vodafone didn't cut any tax, government declared it as default.

The matter went to the Supreme Court and the apex court unequivocally ruled that the tax laws of the day didn't have any provision to cut taxes on overseas assets, notwithstanding its value in India.

Nobody is questioning government's authority to draft laws, the issue being contested is the retrospective nature of the law. When the provision didn't exist at the time of the deal, can you recover such taxes from such companies?


Why did the government took so long to bring this amendment?

Government preferred the law to take its own course. But in the mean time, both Cairn Energy and Vodafone approached the International Court of Arbitration and got a ruling in their favour. It is incomprehensible why didn't the government accept the arbitration and went on to appeal against it.

One could see that the government was very much in a jam. If they didn't make the amendment then its international assets were under the risk of being attached to recover the damages of Cairn Energy. Government was getting a bad press.

On the other hand, if they didn't make the amendment then they would have been accused of siding with the MNCs.

Did the fear of seizure of its international assets became the reason for the government to take a decision finally?

That could be the tipping point. The government was repeatedly facing noise for not addressing tax terrorism. Another reason for the decision could be that India is emerging as a credible alternative to China to attract global investments.

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