Background

• Finance Minister Nirmala Sitharaman recently introduced the Taxation Laws (Amendment) Bill in the Lok Sabha to nullify the tax clause provision that allows the government to levy taxes retrospectively. 
• The government has been fighting legal cases against Vodafone and Cairn Energy on taxes it has claimed retrospectively on transactions these entities entered into relating to operations in the country. Both the U.K.-based companies have won international arbitration rulings that held the Indian government in breach of bilateral investment protection agreements.

What is the genesis of the retrospective tax imbroglio?

• • In the Union Budget of 2012, the then Finance Minister, Pranab Mukherjee, introduced an amendment to the Income Tax Act, 1961, which allowed the government to retrospectively tax such transactions. 

• In terms of taxation, retrospective tax taxes a transaction that took place prior to the law being framed.

• The amendment was passed by the Parliament, allowing the government to ask companies to pay taxes on mergers and acquisitions (M&As) that happened before that date. 
• The issue goes back to 2007 when UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion to which the Indian government raised a demand of Rs 7,990 crore in capital gains saying the company should have deducted the tax at source before making a payment to Hutchison. The company took the matter to the Supreme Court which eventually turned in favour of Vodafone.
• One such indirect transfer was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.
• The changes to the Finance Act allowed India to reimpose its tax demand on Vodafone and Cairn Energy.

Arbitration Ruling

• This prompted Cairn UK to move the Permanent Court of Arbitration at The Hague, Netherlands, saying that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it. The treaty provides protection against arbitrary decisions by laying down that India would treat investment from the UK in a “fair and equitable” manner. Vodafone also filed a case against India’s move. 
• Last year, the Hague court ruled in favour of Cairn UK and Vodafone, quashing India’s tax claim after holding that it violated the “equitable and fair treatment standard” under bilateral investment treaties. 

What are the proposed changes?

• The new Bill proposes to do away with retrospective taxation on the sale of assets in India by foreign entities executed before May 2012, with a caveat — the companies that will benefit from the amendment must withdraw all legal cases against the government and forfeit interest, costs and any damages. 
• The government, on its part, is willing to refund any tax dues it may have collected or seized. 

How are global investors likely to react?

• The Bill is aimed at encouraging more international investments into India and is touted as a welcome relief for companies who have long invested in the country.

Related Information

About PCA

• The Permanent Court of Arbitration was established by the Convention for the Pacific Settlement of International Disputes, concluded at The Hague in 1899 during the first Hague Peace Conference. 
• The 1899 Convention was revised at the second Hague Peace Conference in 1907.
• The PCA is not a court in the traditional sense but provides services of an arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
• The cases span a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade. 
• The PCA has no sitting judges: the parties themselves select the arbitrators. 
• The PCA is an official United Nations Observer. It is headquartered in The Hague, Netherlands.

Members

• The PCA has more than 120 Contracting Parties which have acceded to one or both of the PCA’s founding conventions (1899 and 1907 Conventions).
• India is a party to the PCA according to the convention of 1899.

Reference:

1. https://www.thehindu.com/business/Economy/explained-why-is-retrospective-tax-being-scrapped/article35790901.ece