Unsurprisingly, the 2012 bill drew the ire of both investors and taxpayer fraternity around the world.
By Mukesh Butani & Tarun Jain
The manifestation of sovereignty, especially in today’s civilization, is shaped by pragmatism and the rule of law. Fundamental rights, constitutionalism, an independent judiciary, etc. in a domestic context, coupled with principles of international law and a comprehensive treaty framework, regulate the limits and the exercise of sovereignty. It is no different with taxes. The signing of international treaties regulating taxation rights and tax limits, such as the bilateral double taxation treaties or the WTO treaties – which have been in vogue for decades – or the newer Multilateral Instrument reflects the current scenario in which exclusive national sovereignty is replaced by joint exercise the taxation powers of the contracting parties. In such a paradigm, the assertion of unbridled tax sovereignty is at least incompatible with the progressive international perspective our nation embodies.
The FM tabled a bill amending the provisions of the Income Tax Act of 1961, as amended by the Finance Act of 2012, on Aug. 5 to overturn the landmark decision of the Vodafone Supreme Court. Among other things, the SC had made lawmakers aware of the need for legal certainty to promote FDI and thus thwarted an ominous tax claim that was retrospectively enforced during the offshore reorganization of Indian corporate structures and assets. The then government, even if it was smart and open to review the Omnibus Avoidance Regulations (GAAR), did not slacken and continued to claim its sovereign authority to apply tax measures retrospectively. Unsurprisingly, the 2012 bill drew the ire of both investors and taxpayer fraternity around the world.
Be it the solemn pledge of the former FM in Parliament, the exclusion of future retroactive laws or the administrative restriction of the tax officer’s discretion in 2014 to reopen and effectively thwart past cases, or the 2016 settlement plan that proposed the settlement of disputes The payment of the main tax levies alone did not impress investors with half-baked improvement measures. Constitutional challenges have been raised in courts and international forums alike, which has thinned the Center’s resources to defend its tax policy and the 2012 law. In particular, the spate of hasty measures Cairn has taken in other countries to enforce the Hague Tribunal’s price secured by appeal to the bilateral investment treaty has sparked poor press for the nation, with international media describing the government as unfriendly and arrogant – despite their otherwise decent, if not impressive, tax reform records (GST etc).
In the “Object” declaration attached to the 2021 draft law, the Center recognized that the tax claim resulting from the retrospective tax policy “continues to be a sore point with potential investors”, while “the rapid recovery of the economy after the COVID- 19 pandemic is the order of the day and foreign investment is playing an important role in promoting faster economic growth and employment Tax claim is levied ”, (b) cancel the claim in pending litigation and (c) refund the tax already collected. If passed by parliament, this draft law will not result in the 2012 amendment being withdrawn, but would only restrict its application in cases in which the taxpayer agrees to withdraw all claims and undertakes to refrain from any recovery measures in the future. The 2012 law would continue to exist, but without its harshness and prospective application, unless the taxpayer concerned does not want to reach an agreement.
A key question is, if the government is genuinely generous, why case-specific conditions are attached to the application of the new proposal and why the retrospective law is not withdrawn across the board. The mere repeal of the 2012 law would mean a unilateral admission by the government to waive its claims while the private parties can continue to litigate and push for restitution measures. With the requirements, the government would ensure that neither party comes to an unexpected benefit and that the problem will only be resolved if the taxpayer seeks to completely silence the dispute.
What now? First, the withdrawal will calm the nerves of investors, especially those interested in India’s growth story but hesitant due to a lack of investor protection. This move is likely to boost investor sentiment, coupled with a corporate tax rate of 15% for manufacturing, income exemption for investments in state assets and pension funds, etc. Second, the 2012 law was only applied retrospectively in 17 cases, with Vodafone and Cairn being the most prominent . It is evident that their complexity and commitment were so great that they could not be settled under Vivad-se-Vishwas or other amnesty arrangements. Also, the refund obligation can result in an outflow of Rs 80 billion. This is a small price to pay when you consider the resources required for economic recovery. Third, by withdrawing retrospective application, the government has now gained the upper hand in economic diplomacy in general and in the ongoing negotiations on major economic partnerships with the EU and the UK in particular, as both Vodafone and Cairn are from those countries. The move will give FDI, Gift-City, Sovereign-Wealth Funds, pension funds and other significant investment opportunities a boost. Regardless of the delay in relocating, there does not appear to be any discernible downside and this is certainly a harbinger of economic activity and growth.
The author is a partner, BMR Legal
Views are personal
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