ABOLITION OF RETROSPECTIVE TAXATION

Recently, The Taxation Laws Amendment Bill, 2021 is introduced in Lok Sabha by the Union Finance Minister Nirmala Sitharaman. This bill is aiming to withdraw retrospective tax provisions made in the 2012-13 Budget.

WHAT IS RETROSPECTIVE TAXATION?

According to CBIC- “It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.”

Generally, this is used by countries who think that there might be an error in their taxation policies which lead to the creation of advantages to the companies.

It hurts companies that had knowingly or unknowingly interpreted the tax rules in a different manner.

Countries other than India, including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy also have retrospectively taxed companies- Companies that had taken the benefit of loopholes or errors in the previous laws.

BACKGROUND

In May 2007, Vodafone had bought a 67% stake in  Hutchison for  USD 11 billion.

In September of that year, the Income-tax department has demanded a total sum of capital gains and withholding tax which makes 7,990 crores from Vodafone.

In reversal, Vodafone denies the demand notice in the Bombay High Court, but the judgement come in favour of the Income Tax Department.

Vodafone later challenged the High Court Judgement in the Supreme Court, and Supreme Court gives a judgement in favour of Vodafone and said that it did not have to pay any taxes for the stake purchase.

To overcome the decision of the Supreme Court, Union Government proposed an amendment in the Income Tax 1961 through the Union Budget 2012-13.

This amendment was passed by the Parliament and now once again Vodafone is in shambles of paying taxes. This case had been famous by the name ‘Retrospective Taxation Case’. 

WHAT HAPPENS TO VODAFONE CASE?

In 2014, Vodafone had decided to take arbitration against India at the Permanent Court of Arbitration at Hague, under Article 9 of the Bilateral Investment Treaty between India and the Netherlands. 

And, this also declares its judgement in favour of Vodafone by saying that India has breached the terms of the agreement, it must now stop the efforts to release taxes from Vodafone.

NEWS SUMMARY

The Union Finance Minister Nirmala Sitharaman has introduced The Taxation Laws(Amendment) Bill, 2021 and thus to remove the policy of Retrospective Taxation.

This Bill will amend the Income Tax Act, 1961, so as no tax demand shall be raised in future on the basis of retrospective taxes for any Indirect transfer of Indian assets. 

The Bill also proposes to refund the money collected as retrospective tax in some instances, provided that companies have to withdraw all of the pending cases and do not demand any interest on the refunded amount.

The Government of India has to refund around 8000 crores which is collected as retrospective tax and among which 7000 crores is collected by Cairn India only.

IS THE DECISION COMPULSION FOR INDIA OR SOMETHING ELSE?

This(Retrospective Taxation)  had damaged India’s reputation as an attractive destination for Foreign Investments.

After the Covid-19 pandemic, India is standing at a point where quick recovery of the economy is the need of the present and foreign investments will play a critical role in promoting faster economic growth.

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