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Retrospective Tax: Making India’s investment climate stable

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Tarun Bajaj
The Taxation Laws Amendment Bill, 2021 is a transformational piece of tax legislation, and transformational not just because of its scope and content, it is transformational because of the narrative it has engendered. Stakeholders can now feel secure that for India, assurance of certainty and predictability in taxation is beyond just scoring a debating point.
It is about keeping its promise. I do not recollect any earlier instance where the government has taken such a bold step to withdraw substantial tax demand arising out of an earlier amendment of Income-Tax Act. There cannot be a louder pronouncement of government’s commitment for a fair and predictable tax regime than this bill.
As most readers may recall, the issue of taxation of income arising from indirect transfer of assets has a chequered history and first arose in the Vodafone case where the department succeeded in the Bombay High Court but lost in the Hon’ble Supreme Court that held that such taxation of indirect transfer of assets was not permissible under the then prevailing provisions of the Income-tax Act.
Subsequently, the Income-tax Act was amended in May, 2012 to clarify that such income is and was always, taxable under the Act. The amendment immediately invited strong criticism on making such taxation retrospective, particularly when the Supreme Court of the country had ruled in favour of taxpayers.
The policy of the present government on such retrospective taxation has been unequivocal. The same was eloquently delineated by the then Finance Minister Late Shri Arun Jaitley ji who said on the floor of Lok Sabha on 10th July 2014- that this Government will not ordinarily bring about any change retrospectively which creates a fresh liability. Accordingly, since 2014, the Government has avoided any retrospective amendment of the Income-tax Act, which was not envisaged when a genuine transaction was undertaken by the taxpayer.
On the retrospective part of the 2012 provisions, the government wanted disputes relating to the same to run their logical course before intervening in the matter. In the two prominent arbitrations i.e Vodafone and Cairn, adverse awards were pronounced against India- in September 2020 and December 2020 respectively. The pronouncements of such awards were, in a sense, a logical conclusion of the process.
Further, more than the immediate implication of such orders in these two cases, the awards reinforced adverse investor sentiments on such retrospective taxation. Since then, the Government has been working on a comprehensive solution to put all such legacy disputes behind and remove any sense of uncertainty in the minds of investors on this issue in particular and about tax policy in general. The monsoon session was effectively the first opportunity for the government to bring such a solution to the Parliament for approval.
Coming to the solution, the government was clear from the beginning that any such solution has to be within Indian law. The solution cannot be recognition of arbitration awards as Government’s stand has been that sovereign matters like tax legislations/disputes cannot be subjected to arbitration. Such disputes have to be settled within country’s legal framework and not outside it. The solution should also be comprehensive so that it applies to all cases of such retrospective taxation irrespective of pendency of any dispute- arbitration or otherwise.
Some critics have questioned the timing of this amendment. It has been suggested that the amendment is due to recent actions by Cairn to enforce the award in multiple jurisdictions. Nothing can be farther from truth. As anyone well versed with such arbitration and enforcement proceedings knows, much water needs to flow in river Ganges before such proceedings result in actual pay out, if anything at all. It took around five years for pronouncement of the award in Cairn and Vodafone. Now these awards are under challenge and there are multiple level of appeal. Enforcement proceedings will also go through similar process. All these will consume years.
This amendment also needs to be seen in the wider context of Government’s economic and tax policy. Especially in the last more than one year during Covid -19, Government under the Atmanirbhar Package has taken several initiatives for attracting more investment including foreign investment. Transformative reforms have been undertaken in manufacturing, infrastructure, and financial sectors. The 2021 budget, which received universal acclaim, took several pioneering steps to incentivise investment for boosting economic growth and generate employment. We are at the cusp of inflow of money that wants to flee other regions and come to India. The amendment perfectly fits into such overall policy direction of the government in attracting investment.
Through this amendment, Government is sending a wider message that India is an attractive destination for investment. Investors can feel secure that investment climate shall be stable, and that the government shall deliver on all its promises.
(The author is Revenue Secretary, Ministry of Finance , GOI (courtesy PIB)

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