Why the Tax Amendment Bill is a 'Smart Save Face' According to Experts

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After Vodafone and Cairn Energy won international arbitrations against the central government in tax disputes last year, the Union Cabinet on Thursday, 5 August, cleared the Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha.

The amendment seeks to undo the 2012 retrospective tax law, which was used to heap huge tax demands on companies, including Vodafone and Cairn Energy, for transactions that had taken place prior to 28 May 2012.

Under the new amendment, the amount paid by the companies will be subject to a refund without interest.

Modi Government on Weak Legal Ground

The Retrospective Tax law was always a clarificatory amendment to the Income Tax law that constituted of no explicit provision for the taxation of offshore share transactions with underlying Indian assets.

In a report for BloombergQuint, Menaka Doshi writes, "The Vodafone Tax or Retro Tax, as it came to be known, generated an economy of its own – thousands of crores in tax demands on past transactions, hundreds of lawyers to defend the deals and as many consultants to vet legacy FDI structures and tax implications."

She further highlighted the inattentive legislation had also "precipitated the decline of one government accused of "tax terrorism".

However, in the report, Doshi writes, "the proposed amendment bill is not a sudden pang of conscience for the Modi government."

After a French Court's froze Indian government assets in France so Cairn could recover taxes and damages it was awarded earlier, "the amendment bill is a smart save face," Doshi noted.

She further stated,

"Though it has filed appeals, the Modi government is on weak legal ground and facing serious image damage from a problem not of its creation...Yes, it denies any interest or penalty payments to those wronged by the Retro Tax, but it's the most any government could offer in these circumstances."

Menaka Doshi

Speaking on how lucrative the government's proposal would prove for companies pursuing arbitration proceedings against the government, Dhruva Advisors' Ajay Rotti spoke to BloombergQuint and said that as per the bill, "If a tax demand was raised and the dispute is at different levels, then if you satisfy certain conditions, then that order will be deemed to have never been passed... Therefore, yes, Vodafone and Cairn will stand to lose the costs that have been awarded. There is also no interest so it may not sound as lucrative in that sense."

However, he added, "But the fact is that they have been able to obtain a closure for this, which is really what somebody like Cairn has been stating."

(With inputs from BloombergQuint)