The Bill, introduced in the Lok Sabha, nullifies the tax demand on the indirect transfer of Indian assets on transactions prior to 28 May 2012. The law will apply prospectively: gains from the sale of shares of a foreign company will be taxable in India if such shares, directly or indirectly, derive value from assets located in India. This makes eminent sense.
The government’s decision to amend the income tax law to bury the ghost of retrospective taxation is pragmatic and bold. It will end the protracted litigation with companies such as Cairn Energy and Vodafone, helping restore investor confidence. The Bill, introduced in the Lok Sabha, nullifies the tax demand on the indirect transfer of Indian assets on transactions prior to 28 May 2012. The law will apply prospectively: gains from the sale of shares of a foreign company will be taxable in India if such shares, directly or indirectly, derive value from assets located in India. This makes eminent sense.
The original amendment to the tax law brought in by Pranab Mukherjee as finance minister of the UPA in 2012 overturned a Supreme Court order that had negated a tax demand on Vodafone India amounting to Rs 11,792 crore and subsequent penalty of Rs 7,900 crore. The NDA, which had criticised the government, did not reverse the retrospective tax during its first tenure. Although Vodafone won the arbitration award at the the Permanent Court of Arbitration at The Hague, the government did not accept the verdict. By nullifying the retrospective clarification now, the tax demand on Vodafone gets dropped.
In Cairn’s case, the company had consolidated different group hydrocarbon assets underCairn IndiaNSE 0.81 % in 2006, with a nod from the Foreign Investment Promotion Board, prior to its Indian initial public offering. There was no change in the ultimate beneficial ownership, and yet the tax office invoked, in the retrospective clarification of 2012 to demand capital gains tax on the Cairn reorganization. After the government failed to honour the international arbitral award in favour of Cairn, the company seized Indian state-owned properties in France to recover a slice of the $1.7 billion arbitration award. India’s reputation as an investment destination was getting tarnished. Now, the government, that raised an arbitrary demand, will settle the dues with Cairn. Fifteen other cases where similar tax demands have been raised will also be settled.
Of course, in hindsight, the government admits that retrospective amendment militates against the principle of tax certainty. The Parthasarathy Shome committee had underscored this point during the UPA regime. But the reversal of the retrospective taxation meant taking a bold political call, and Finance minister Ms Nirmala Sitharaman deserves credit.
There are bodies meant to provide tax certainty to investors. These include the Advance Pricing Authority (APA) on matters related to transfer pricing, and the Authority for Advance Rulings (AAR) that tells those who seek clarity on their tax liability (read eligibility to avail various tax-planning opportunities and arrive at the tax rate applicable to them. These bodies must work better and become more robust.