Modi Government on August 5 tabled the Taxation Laws Amendment Bill in Lok Sabha. A move that is expected to provide relief to Cairn Energy and Vodafone. The Bill will likely solve the contentious issue of retrospective tax that was introduced by the UPA government in May 2012.
“The Bill proposes to amend the Income-tax Act, 1961 so as to provide that 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 28th May 2012,” Finance Minister Nirmala Sitharaman said in a written statement along with the bill.
The dispute with Cairn Energy is almost 15 years old. In 2006-07 after Cairn UK had transferred shares of Cairn India Holdings to its Indian counterpart, Cairn India; the tax authorities decided that since Cairn UK had made capital gains, it ought to pay capital gains tax, which the company refused to pay. The UPA government of that time then introduced the retrospective tax laws in 2012, starting a 10 year-long legal battle between the Government of India and Cairn Energy.
A similar dispute arose with Vodafone where the Indian government made a tax demand of ₹ 22,100 crores from the company. Vodafone chose to challenge the new tax both nationally and internationally. On September 25, 2020, the Permanent Court of Arbitration at the Hague ruled that India’s retrospective demand of ₹ 22,100 crores as capital gains tax was in breach of the guarantee of fair and equitable treatment and asked the Indian government not to pursue the tax demand against Vodafone.
Similar rulings in favour of Cairn Energy had put the Indian government under a lot of international pressure. India’s reputation as an investment destination took a hit from these two cases. Finally, the Modi government buckled and introduced new amendments to tax laws to eliminate the concept of retrospective tax.