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Reuters | 5 August 2021
India to scrap retrospective tax law in olive branch to global firms
By Aftab Ahmed, Manoj Kumar
NEW DELHI, Aug 5 (Reuters) - India on Thursday proposed scrapping a controversial law that taxed companies retrospectively and said it will refund disputed amounts, a move that could potentially settle its multi-billion-dollar tax cases with Cairn Energy and Vodafone.
The amendment to the tax law could resolve at least 17 disputes of tax payments amounting to 500 billion rupees ($6.7 billion) or more, and will help boost investor confidence in the South Asian economy, analysts said.
Taxes on the indirect transfer of Indian assets before May 2012 will be nullified if companies withdraw litigation and give an undertaking that they will no longer claim damages, a government proposal presented to parliament said.
“This is a bold move that addresses the concerns of many foreign investors,” said Rohinton Sidhwa, Partner at Deloitte India.
At the heart of the long-running taxation disputes was a 2012 Indian law that enabled its tax authorities to make retroactive claims on overseas corporate deals.
Tax demands under the law had stoked high-profile legal challenges from companies and soured the investment climate even before Prime Minister Narendra Modi’s government came to power in 2014. But the prime minister faced criticism for not swiftly resolving the matter.
Cairn, which has oil and gas operations in India, was awarded damages of more than $1.2 billion here last year at a tribunal at The Hague after a lengthy tussle with New Delhi over certain tax claims.
And The Hague tribunal last year ruled that India’s imposition of a $2 billion tax on Vodafone related to its purchase of Indian mobile assets from Hutchison Whampoa in 2007 breached an investment treaty here between India and the Netherlands.
Tarun Bajaj, revenue secretary at the finance ministry, told Reuters that the current government had proposed scrapping the law as it doesn’t believe in retrospective taxation.
“Now it depends on companies to come forward,” and settle, he said.
Cairn in a statement said it was monitoring the Indian law changes and will provide “a further update in due course.” Vodafone declined comment.
EYEING ECONOMIC BOOST
India’s proposed changes come just weeks after a French tribunal ordered a freeze on some 20 properties of the Indian government as Cairn started enforcing its arbitration award. The government at the time said it “will vigorously defend its case”.
India has also proposed to return the principal tax amount companies may have paid under the controversial 2012 law, but it will not refund any interest New Delhi may have owed to them if it lost the legal cases.
In Cairn’s case, for example, that amount stands at roughly 80 billion rupees ($1.08 billion).
Some analysts, however, said the delayed course correction by the Indian government may not help all disputes as some companies would not like to lose the interest due to them.
The move is seen as one which will attract foreign investors to India and in turn bolster economic recovery after Asia’s third largest economy contracted 7.3% in the last fiscal year ending in March.
“The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour,” finance minister Nirmala Sitharaman told lawmakers.