Did legal issues push the center’s hand? Will global investors be happy with the changes?
Story so far: On Thursday, Finance Minister Nirmala Sitharaman introduced the Lok Sabha Tax (Amendment) Bill, which paves the way for repealing the tax. The government is fighting lawsuits against Vodafone and Kern Energy over taxes levied prior to transactions in which these companies entered into operations in the country. Two UK-based companies have won international arbitration award, and the Indian government is violating bilateral investment protection agreements with the Netherlands and the UK, respectively.
What is the origin of the retroactive tax embarrassment?
In May 2007, Vodafone bought a majority stake in Hong Kong Hutchison Wamboa in Hadison Essar for $ 10.9 billion. The transaction took place in the Cayman Islands, where Hutchison’s HTIL unit holds 100% CGP investments (a real shareholder in Hutchison Essar), which was acquired by Netherlands – based Vodafone International Holdings. In September of that year, the Indian Income Tax Department sent a formal notice to Vodafone alleging that the seller had failed to withhold tax from the amount paid to Hudson in lieu of capital gains tax. The case went to court. In January 2012, the Supreme Court of India backed Vodafone and ruled that indirect transfer of shares to a non-Indian company is not taxable in India. Separately, in 2006-2007, Cairn Energy UK restructured its Indian oil and gas exploration business in India prior to the planned IPO and later sold a portion of its stake in Cairn India Limited. , First to Petronas in Malaysia and later to Vedanta Group 2009-11.
Editorial | Fast forward: Retroactive load
In the Union Budget 2012, the then Finance Minister Pranab Mukherjee introduced an amendment to the Finance Act allowing the government to levy a pre-tax on such transactions. In 2014, the Income Tax Department froze the remaining shares of Cairn in Cairn India. The following year, Cain began international mediation against the government under the India-UK Bilateral Investment Agreement. In 2018, IRS also acquired a 5% stake in a British company in Vedanta. The shares were later sold, while the $ 223 million tax refund was suspended in another transaction. It also lost $ 159 million in profits due to Cain Energy UK
What are the proposed changes?
The bill, which was introduced before May 2012, proposes to repeal advance taxes on the sale of assets in India by companies – the companies benefiting from this amendment should withdraw all lawsuits against the government and lose interest, costs and any damages. The government is ready to recover the tax money collected or confiscated. At Rs 7,900 crore, the conversion to Cain Energy will take up the bulk of this proposed repayment total of Rs 8,100 crore.
Why did the government decide to overturn the verdict?
Although the government imposed tax requirements on 17 such cases, Vodafone and Kern drew the most attention. The two initiated international neutrality under bilateral agreements. Vodafone received a favorable verdict in the September 22,000 crore case from the Permanent Arbitration Court in The Hague in September 2020. In December, an arbitral tribunal ruled in favor of Cairn and awarded it $ 1.2 billion and interest and damages totaling $ 1.7 billion. India has appealed both the verdicts. This year, Kern filed a petition seeking the confiscation of Indian assets such as Indian Jet Air India in the United States, Canada, Singapore, Mauritius and the Netherlands. It also received a court order in France to freeze some of India’s real estate assets in Paris, valued at about $ 24 million. Although the cases are on appeal, the loss of arbitration cases and Cairn’s expropriation of Indian assets abroad may have compelled the government to do so. The bill states: “Such a reversal would violate tax protection policy and damage India’s reputation as an attractive destination … hours and foreign investment play a key role …”
How will global investors react?
Even after the bill becomes law, companies like Cain Energy need to convince their stakeholders to heed the warnings. However, potential investors may be encouraged because the government has indicated its intention not to impose preferential taxes and has expressed a desire to withdraw a measure that could adversely affect the flow of foreign investment.
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