Retrospective means "to look back over the past". To get a better idea of retrospective law, we may need to address a few basic terminologies.

• Capital Gains Tax (CGT): The tax levied on the profits of the investment while selling it is called CGT. When a seller buys an asset for INR 100 and sells it for INR 150, the tax levied on the INR 50 is the Capital Gains Tax.
• Withholding tax: The process in which the buyer withholds the CGT while paying to the seller. In the above transaction process, when the buyer pays the tax levied on the profits of INR 50 of the seller, it is known as withholding tax.
• Bilateral Investment Treaty (BIT): Countries sign treaties to protect the interest of the investors and protect them from losses. This is to boost foreign investments and the investor's confidence.
• Investor-state Dispute Settlement (ISDS): ISDS states, in a dispute between the center or state and private sector or MNCs, should exhaust all other domestic avenues for dispute resolution. Only then can they proceed to international arbitration.
• Retrospective tax: “Tax levied on a specific transaction taking effect from a date in the past, creating an additional charge or levy of tax by an amendment from a specified date in the past.” - Journals of India.

Why Retrospective Tax?

RETROSPECTIVE TAXATION - INDIA

India follows the taxation laws based on the Income-tax Act- 1961. The act did not have to provide tax transactions of Indian assets taking place outside of India among non-Indian entities. Over the past one and half decades, companies used this loophole to avoid CGT on transactions of their assets in India. E.g., the Vodafone and Cairn case.

The Vodafone case was the main reason for this retrospective tax law in India. The government sent tax notices to these companies. Still, it was disputed in the court, and the supreme court ruled in favor of the companies citing that there was no provision in The Income Tax Act 1961 to tax such transactions between non-Indian entities. As a result, the Indian government came up with a new amendment of the Income Tax Act (1961) during the Financial Bill 2012. The government decided to tax all such indirect transactions of Indian assets with retrospective effect from 1961.

RECENT CASES:

1. Vodafone International Holdings BV vs. The Republic of India

Vodafone versus Government of India case is one of the longest fought cases related to retrospective taxation. It all started after Vodafone acquired a controlling stake in Hutchison Essar, a company based out of Hong Kong, in 2007. It is also the 4th largest telecom firm in India. CGP Investment Holdings, a company in the Cayman Islands, is a subsidiary of Hutchison Essar, Hongkong.

Vodafone is a UK company. Vodafone, Netherlands, made a deal of $ 11.2 billion with CGP Investment Holdings based out of the Cayman Islands to acquire the Indian assets of Hutchison Essar. The entire deal happened in the Cayman Islands (Overseas deal). After the deal, the Government of India sent tax notices to Vodafone to pay the Capital Gains Tax (CGT). Vodafone had challenged the tax notice in Bombay High Court. In 2008, the Bombay High Court defended the Government of India’s decision and asked Vodafone to pay the tax.

Vodafone challenged the Bombay High Court’s decision in the Supreme Court. In 2012, the Supreme Court of India had pronounced its judgment in favor of Vodafone. The Supreme Court said that tax could not be levied as the entire deal happened in the Cayman Islands, where the Indian tax authority has no territorial tax jurisdiction. The Government of India filed a review petition in the Supreme Court in February 2012, and the plea was dismissed. Rs. 2500 crore /- deposited by Vodafone was returned with 4% interest as ruled by the Supreme Court.

The Government of India has brought in the Retrospective Amendment. Parliament passed the Finance Act, 2012, amending the law retrospectively, and according to it, the deal is taxable. It claims that the amendment is not retrospective but clarifying in nature. Then a fresh demand was issued to Vodafone to pay a tax of 14,200 crores. In April 2014, Vodafone served arbitration notices under the India-Netherlands treaty. In 2016, the tax demand was updated to 22,100 crores with interest.

On September 25, 2020, the international arbitration tribunal in The Hague pronounced its judgment in favor of Vodafone. According to it, India’s imposition of tax liability on Vodafone breaches an investment treaty agreement between the Netherlands and India. Hence, Vodafone has won the case after a long legal battle. To reduce or eliminate such arbitration claims in the future, India has ended such agreements with over 50 countries.

2. Cairn Energy Plc and Cairn UK Holdings Limited vs. The Republic of India

The origin of this infamous legal dispute can be traced back to 2006-07, in what was termed a restructured deal by Cairn Energy. Cairn India Holdings Cayman Island and its subsidiaries previously owned the Indian operations before Cairn India's formation and its IPO. Cairn UK Holdings, a subsidiary of Cairn Energy, owns Cairn India Holdings. Before Cairn India's IPO, Cairn UK Holdings assigned its assets (in India) to Cairn India. Cairn India then issued 69% of its share to Cairn UK Holdings. Cairn Energy now owns 69% of Cairn India through Cairn UK Holdings Ltd. The I-T department noticed this internal restructuring deal and decided to tax the company for its alleged capital gains. The company refused to pay the tax, stating that it interpreted capital gains differently.

Cairn India was later sold to Vedanta group by Cairn Energy in 2011 minus a 9.8% minor stake. Cairn Energy could not sell this minority shareholding due to the intervention of the I-T department. Cairn India was also not allowed to pay dividends to Cairn Energy due to its refusal to acknowledge the alleged tax payment.

After rounds of litigation in the Delhi High Court and the Income Tax Appellate Tribunal, the company lost the case. Cairn was found to not have paid taxes amounting to Rs 10,247 crore. After adding penalties, this amount rose to around Rs 24,500 crore.

In 2015, the tax authorities took hold of Cairn Energy's residual 9.8% shareholding of Cairn India, estimated to be worth $1 billion. During the arbitration, the government also confiscated dividends worth Rs 1,140 crore due to its 9.8% stake in Cairn India. The IT department also refused a Rs 1,590-crore tax refund due for the company. This led to Cairn raising proceedings under the UK-India Bilateral Investment Treaty in Hague's Permanent Court of Arbitration (PCA).

THE TAXATION LAWS (AMENDMENT) BILL, 2021

The central government of India introduced ‘The Taxation Laws (Amendment) Bill, 2021’ on August 5, 2021, in the lower house of parliament to withdraw tax demands made through the Finance Act 2012, which ensures the collection of retrospective tax on indirect transfer of Indian assets. The bill aims to modify the Income-Tax Act, 1961 to ensure that retrospective tax demand shall not be raised on any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e., the date on which the Finance Bill, 2012 received the President’s permission).

Key Features of Amendment Bill:

1. The bill provides that tax demand shall not be raised in the future based on the retrospective amendment made through the Finance Act, 2012, for any indirect transfer of Indian assets if the transaction was undertaken on or before 28th May 2012
2. It provides that the demand raised for indirect transfer of Indian assets shall be nullified by fulfilling specified conditions and filling out an undertaking
3. The bill ensures to refund the amount paid in the cases without any interest thereon
4. It also proposes to modify the Finance Act, 2012 to provide that the validation of demand under the Finance Act, 2012 shall cease to apply on fulfillment of specified conditions and furnishing of an undertaking
5. Moreover, it empowers CBDT to make rules to provide the form and manner in which an undertaking should be submitted

Conditions to be fulfilled:

Although the Indian government has decided to withdraw retrospective taxation, there are certain conditions the government has specified for it:

• Firstly, suppose the government has already collected tax retrospectively from the entity. In that case, the government will repay the whole amount without any additional interest or penalty, and the beneficiary cannot demand any interest on it.
• Secondly, if any case is filed against the government, they will have to withdraw the case to avail the provisions of the taxation amendments.
• And finally, the entity will have to give a written undertaking to the government that they will not claim any particular damage against the government in the future concerning the withdrawn case regarding retrospective taxation.

HOW WILL THE AMENDMENT IN THE TAX SYSTEM BRING CHANGE?

1. The clarity to investors: The amendment could clarify all prospective or existing investments and instill foreign investors with confidence in the Indian economy. It will help attract more foreign investment to India, improve the ease of doing business in the country, and indicate that the government welcomes businesses.
2. Instilling credibility: When cleared, the bill will instill a sense of credibility while partnering with the GOI and help resolve existing issues with parties externally, which will help avoid unnecessary litigations and save time and cost for the government.
3. Bilateral Free Trade Agreement (India & UK): The amendment would provide a good starting point for India and UK, who are scheduled to start negotiations on a bilateral free trade agreement to enhance trade and investments.
4. Addressing stressed sectors: Sectors like telecom and oil exploration where investors were hesitant to get involved can see huge benefits if the new bill addresses key issues about such sectors and clarifies investors.
5. Disinvestment: The government is conducting disinvestment of public sector entities in India, e.g., Air India. But the investors were concerned about what if the deal is almost done and a company like Cairn, which won the international arbitral tribunal against the government of India, files a case and seizes its properties overseas. This would have hampered the disinvestment process. But now, the amendment of taxation laws has assured investors to invest in these public sector entities.
6. $5 Trillion Economy: The increase in investments and improved ease of doing business will provide an impetus to the country’s goal of becoming a five trillion-dollar economy.

.    .    .