The somewhat erratic nature of India’s tax system came back under the spotlight this week as the government amended its Income Tax Act to nullify certain retrospective tax demands. The Vodafone Group will be one of the beneficiaries.
The Taxation Laws (Amendment) Bill, 2021 aims to withdraw tax demands made on the indirect transfer of Indian assets before 28 May 2012. Local news media have said that the government also plans to refund the amount paid in these cases without any interest.
The whole episode began almost ten years ago, in 2012, when the country’s Supreme Court ruled that the Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct, and that it did not have to pay tax related to the company’s entry into the Indian market through the acquisition of a controlling stake in the operator Hutchison Essar in 2007.
The then Finance Minister proposed an amendment to the Finance Act, which gave the Income Tax Department power to retrospectively tax such deals.
The Act was passed by Parliament that year. As a consequence, Vodafone, and a British oil and gas exploration and development company called Cairn Energy, were both hit with large tax bills.
In September 2020 we reported that the international arbitration tribunal in the Hague had rejected the Indian government’s imposition of a $3 billion tax demand on the Vodafone Group related to the Essar deal.
With the government now giving away the right to retrospectively tax transactions entered into before May 2012 the whole issue appears to be over, good news for Cairn Energy and the Vodafone Group, though it doesn’t appear to have any relevance to the troubled Indian operator Vodafone Idea.
Nevertheless a lot of local businesspeople are likely to be relieved – not least because continuing to pursue a retrospective tax law could undermine the Indian government’s claims that it welcomes foreign investment into the country.