In the case of Cairn Energy, the Permanent Court of Justice in The Hague asked the Indian government to return the value of the seized and sold shares, the withheld tax refund and the seized dividend in order to enforce the retroactive tax claim.
Lok Sabha on Friday passed “The Taxation Laws (Amendment) Bill, 2021,” which aims to amend the Income Tax Act to reduce India’s tax claims on 17 companies, including Vodafone and Cairn Energy, on capital gains from transactions prior to May 28, 2012. These claims were made on the premise that the transaction values were affected by significant underlying Indian assets.
The finance minister described the law of 2012, which will be practically overridden by the clarifying amendment, as both “illegal” and “bad for investor sentiment”. She said the government’s move was aimed at fulfilling the promise made back in 2014 by the ruling BJP, Prime Minister Narendra Modi and former Treasury Secretary Arun Jaitley, that the controversial law passed by the UPA-II government in 2012 would be: checked as “we do not believe in retroactive taxes”.
Although the move has been hailed as brave and pragmatic by taxpayers and tax experts, the fact remains that the NDA government has so far been aggressively pursuing these tax cases; it even raised 7,900 billion rupees from Cairn by seizing and selling the British energy company’s stake in its former Indian entity, seizing dividends and withholding refunds. This apparently reflected an ambivalence, if not a reversal, of the policy articulated by the government. Of course, the amounts recovered under retroactive tax claims – approximately Rs.8,100 billion – are now being refunded without interest.
Jaitley had said in the House of Representatives that the law could not be changed at this point because the matter was in court, Sitharaman recalled. The government is unable to make changes to the law as the judicial process is over, she said.
Both Vodafone and Cairn received arbitrations in their favor in September and December 2020, respectively. Sitharaman said that once the two complaints were resolved, the government will open consultations with various stakeholders, including the Justice Department. “Now we have presented this bill at the earliest opportunity,” she said.
Finance Minister TV Somanathan said on Thursday: “We agree with the previous position – we have the sovereign right to taxes and we keep that right. However, we do not accept that Parliament’s sovereign right is tried in foreign courts. However, we will not enforce any tax claims based on retrospective changes and the amount collected would be refunded without interest. “
In the Cairn Energy case, the Hague Permanent Court asked the Indian government to return the value of the seized and sold shares, the withheld tax refund and the seized dividend in order to enforce the retroactive tax claim.
Since the government refused to honor the award, the company filed in the United States for Air India’s assets to be confiscated. It also received an order from a French court to freeze 20 Indian properties in Paris in order to reclaim $ 1.2 billion plus interest and penalties. The move brought India together with nations like Pakistan and Venezuela, which have faced similar actions from companies demanding arbitration enforcement.
Under the draft law passed by the House of Commons, the retrospective provisions would not technically be withdrawn, but their application would be restricted by the taxpayers concerned subject to factors such as the withdrawal of litigation, including those under arbitration and bilateral investment agreements. In addition, it is legally sanctioned that, based on the retrospective amendment of 2012, no tax claims will be levied for the indirect transfer of Indian assets in the future. The capital gains tax on indirect transfers will of course continue to apply to all transactions after the 2012 amendment.
Applying this retrospective tax law, India struck Vodafone in January 2013 with a tax claim of Rs 14,200 billion, including the main tax of Rs 7,990 billion and interest. This was updated to Rs 22,100 crore plus interest in February 2016. The country also hit Cairn Energy in January 2014 with an estimate of 10,247 crore, which after taking penalties into account was 20,495 crore.
(With PTI inputs)