Abolishing retrospective tax law to boost economy

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Abolishing retrospective tax law to boost economy

Sunday, 26 September 2021 | Brajesh Kumar Tiwari / Suman Tiwari

Abolishing retrospective tax law to boost economy

The Government stand, prima facie, appears to cost huge loss to the State exchequer, but in the long run its benefit in terms of attracting foreign investment and achieving the target of USD 5 trillion economy by 2025 cannot be denied

The Government had on August 5 scrapped the retrospective tax law by amending Finance Act 2012 and the IT Act 1961 which got presidential assent on August 13, 2021. It was amendment in Finance Act 2012 brought by the then Finance Minister which allowed the taxman to levy taxes claimed retrospectively on deals that were executed after 1962 that involved the transfer of shares in a foreign entity that has its assets in India. This archaic practice had pushed back India’s taxation regime for corporates by 50 years and allowed authorities to slap capital gains levies wherever a company, with business assets in India, changed hands overseas.

Certainly, the new amendment by the Government of India will bridge the gap in international trade by providing a framework for resolving international arbitration cases that the Government has lost, namely Vodafone group plc and Cairn energy and 15 others. Needless to say that this amendment was a need of hour as focus point of India at the present time is to portray itself as an investment destination to investors across the world, which will eventually help India being depicted as country committed to abide by international treaties and laws.

The two big advantages of abolishing the retrospective tax are: boosting India’s image among global investors (translating into increased FDI) and giving foreign firms a level-playing field vis-à-vis Indian corporate giants. In recent times, India’s image took a big hit when energy explorer giant Cairn went ahead with seizing the Government of India’s assets abroad and telecom giant Vodafone-Idea giving strong signals of winding up its India operation.

The Indian Government had slapped a tax demand of crores of rupees on Cairn and Vodafone. But both refused to pay taxes and challenged the decision of tax department and ultimately won the battle in the Permanent Court of Arbitration in Hague, Netherlands. The claim of Cairns was that the Government is violating the India-UK bilateral investment treaty. Considering all the facts, the international court ruled in favour of Cairns and awarded $1.4 billion as damages, the Cairn then moved a French court which gave the order to freeze Indian assets in Paris to recover Rs 8,897 crores. Definitely this stain on Indian taxing could be hazardous for development of long-term Indian economy. This sour episode tainted India’s image like never before as it placed the country in the league of some disturbed economies whose assets are taken away for non-payment of arbitration award.

The Government’s decision to discard the retrospective taxation law not only gave breather for Vodafone and Cairns, but also transformed India’s image in global world. Along with repealing this tax and Supreme Court’s recent verdict on honouring Singapore arbitrator decision that upheld US- based e-commerce company Amazon’s plea against the Rs 24,731-crore merger of Future Retail Ltd (FRL) with Reliance Retail might change things favourably for global companies.

Many in the corporate world have been silently claiming the Government is favouring handful homegrown conglomerates by tweaking laws that gave them undue benefits. India would very much want to shed this image, especially at a time when big businesses are looking beyond China to have a permanent base.

Overall, phasing out retrospective tax means restoring India’s reputation as a fair and easy to predict regime which believe in putting an end to unnecessary and expensive litigation without spending crores in these never-ending legal tussles. The step will also promote cross-border merger and acquisition. Last but not least, the scrapping of such draconic law will be helpful in enhancing India’s national ranking in World Bank Ease of Doing Business (EoDB) index under 50 (it is presently 63).

In total, 17 entities would be benefited from this change to whom tax demand of Rs 1.10 lakh crores was made. The Government has proposed to refund the amount paid in litigation by companies without any interest thereon. The total amount involved for all cases is about Rs 8,100 crore, of which about Rs 7,900 crore is related to the Cairn dispute. The effectiveness of axing this tax law now depends on whether the entities who have obtained an award that comprises interest component will take up the offer.

The Government stand, prima facie, appears to cost huge loss to the State exchequer, but in the long run it will benefit in terms of attracting foreign investment and achieving the target of USD 5 trillion economy by 2025. Definitely it has enhanced credibility of India in international domain and depicted India’s commitment to follow international law and conventions governing international behaviour. The Government move also conforms to and promotes international harmony provided in Directive Principle of State Policy of the Constitution of India.

(Brajesh Kumar Tiwari is Associate Professor, Atal Bihari Vajpayee School of Management & Entrepreneurship, Jawaharlal Nehru University New Delhi. Suman Tiwari is a Judge, Uttar Pradesh Judiciary)

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