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Untaxing the Taxed

Updated: Aug 29, 2021

In this week's FinMail, we look at a controversial tax regime - Retrospective tax. We also look at what problems did it bring for the foreign corporates in India and what led the government to end this once and for all.

The Story

Retrospective Tax has been in the news recently but probably for all the right reasons. For those who might not be aware of this, the NaMo government recently abolished a tax regime that was haunting the foreign corporates in India and especially the Telecom Major - Vodafone Idea. The government via an amendment to the Income Tax Act wants to strip off the controversial Retrospective Tax which was brought into life by the then Finance Minister Pranab Mukherjee. The government had a hanging sword on its neck in the form of risk of its foreign asset being seized by Cairn Energy after it won a legal battle against the Government of India under International Arbitration, all because of the same - Retrospective Tax.

This controversy of retrospective tax has been damaging the reputation of India since it came into effect in 2012. In fact, it was a major point of the election campaign for the NaMo government in 2014, it had promised to abolish this regime when it came into power and finally, after 7 glorious years, the government has now decided to scrap it.

But what is Retrospective Tax actually?

What was the need for it that the UPA government had to bring it into first place?

And if it was created then what was the need to scrap it off?

You know where to find it right. Let's dive right in.

What is Retrospective Tax?

Google defines the meaning of the word Restrospective as 'looking back on or dealing with past events or situations'. So it's clear to us that Retrospective Tax would mean it has something related to tax and the past i.e. tax on what has already happened.

In terms of taxation, retrospective tax means giving the effect of the amendment in the present law before the date on which the changes were brought in.

(Ayy, Muh se Supaari nikaal ke baat kar re baba!)

In simple terms, Retrospective Tax is a tax that was brought by changing the current law (here, Income Tax Act) for a transaction/s that happened in the past. Retrospective Tax is like a punishing now for a past deed. Let's understand Retrospective Tax by an example.

POV:- You're a resident of a metro/sub-metro city.

We know that talking on the phone while driving a vehicle is a crime that attracts fine. The fine would range from ₹100 or ₹1000 depending on the mood of the Traffic Police Officer, JK :p But, yes it is a crime. And you need to pay a fine. Let's agree to that for a while. Now, one of the first bencher in the Traffic Police control room had a wild idea that even wearing earphones or earbuds while driving a vehicle should be fined because technically you are talking on the phone while driving.

So the local administration likes this suggestion and decides that vehicle riders will now be charged for talking even via earphones/earbuds. You don't want to argue much and you agree to it, can't do much here, right? Accept it & move on. End of the story? Well, not exactly. The Municipal Corporation also orders Traffic Police to send memos to the people who were seen talking on earphones on traffic cameras in the last 3 months. Now, this is unjust, right? Why should a person be fined for an act in the past that was not a crime at that time but now it is, as the law has been changed?

Yess! That's how it feels. (It sounded much better with Loki in mind)

In the same way, the introduction of Retrospective Tax sparked debates but majorly criticism from technically everybody when Pranab Da announced this tax regime in 2012, including Investors, Economists, Government Officials, Opposition, heck even the Congress government itself.

Let's go back to the past and understand why this infamous Retrospective Tax was introduced?

2007: Hutch-Vodafone Deal

(Totally trying not to be nostalgic here and sticking to the plan)

Remember Hutch? Yup wahi Pug vala and Irrfan Khan vala Hutch. Everything was going good & then one day suddenly, the Hutchinson guys decided to sell its stake in Hutch India to the Vodafone guys (Hutchinson used to own 67% of Hutch India).

Now as per a normal transaction, there involves a sale of the asset and a price that is paid against it. Similarly, 67% stake of Hutch India was the stake and $11.1 Billion was the money that was paid to Hutchinson guys. It was, of course, a Profitable deal for them and thus it meant that they needed to pay Capital Gains Tax on the sale that they just made.

But here's the catch, Hutchinson did not own Hutch India directly. It owned Hutch via an offshore shell company. Yup! Tax Havens! It owned Hutch India via a company in Cayman Islands which is a Tax Haven. We have already simplified Tax Havens, you can read that issue from here.

So technically, what happened was that the Vodafone guys did not purchase Hutch India directly. Instead, it purchased the shell company which owned 67% of Hutch India. And thus, the Hutchinson guys did not need to pay Capital Gains Tax to the government as it did not own Hutch India directly and the deal and the money it made was in Cayman Islands.

Is it wrong? Ethically, yes. Legally? no. And that's the problem.

When tax officials came to know about it, they went knocking to the Vodafone guys and said, "Buddy, aapke tax baki hai." And Vodafone simply denied that it did not need to pay taxes as nothing happened in India. Every asset that was sold was owned by a company in Cayman Islands and thus it did not need to pay tax in India.

The government and Vodafone went into a legal battle starting at High Court where the government won as HC said, "Hey, Buddy you can't do this. Go pay taxes." But Vodafone challenged the verdict of HC in the Supreme Court and there, the Vodafone Guys won as the SC did not find any illegal activity there. SC has to play by the rules and not by the ethics so SC said that the government should not ask any taxes from Vodafone now.


(There's a but)

The story did not end there. The government couldn't digest the fact that it can't do anything with the SC denying them to ask Vodafone for taxes. But they still wanted revenge and thus they promised that they will take all the possible means to gain back their tax by hook or by crook.

(No, that's not what exactly happened. It is just us making some Masala out of the story)

The government did not want to give up on the tax as it was something in the range of ₹7000-₹8000 Crores and obviously, no one would give up on that big amount. So, Pranab Mukherjee bought up a solution in his own way - If we can't beat the rules, let's make new rules.

In 2012, the UPA government made an amendment to the Income Tax Act and said that all these types of deals that have happened in the past like in the case of Vodafone would be taxed. Like literally, all the deals that have happened between 1962 and 2012 would be checked for similar evasions and would be taxed.

Yes, it is as silly as it sounds and there's no denial in that. While researching about the retrospective tax we even came across an article that claimed that the UPA government too was not happy with Pranab Da's decision and some even suggested that he had been promoted to President as an act of Damage Control.

What followed the implementation of Retrospective Tax?

If the implementation was not ridiculous enough, controversy followed. India's government received backlash from international investors, big investors from the country within, Economists, Opposition and as mentioned. Bringing this into effect meant that many corporates would end up paying lots of money as taxes to the government. This did not go well with the companies that owed huge sums to the government suddenly under the new law. And lawsuits followed as corporates came knocking to High courts & Supreme Court. If they were not satisfied with the verdict of SC some even bought this to the International Tribunals. And soon the matter began an International topic which led to India being criticized for this law.

Retrospective Tax which was brought in to chase the tax evaded by Vodafone PLC, invited more troubles for the government in the form of more lawsuits. But in this chase, there's this one company with which the government locked its horns and the battle is now at a point where the government's foreign assets are at risk of being seized by the company - Cairn Energy.

What's up with Cairn Energy?

Cairn Energy was among the top corporates that had its heart in its hand when the government announced Retrospective Tax as it meant that Cairn Energy would have to pay the government as ₹24,500 Crore under the new law which it had legally evaded via offshore transactions and companies registered in Tax Havens. But this didn't go down well for the government as Cairn Energy certainly didn't want to pay the government. It started as a normal legal battle between Cairn Energy and the government at Income Tax Appellate Tribunal (ITAT), followed to Delhi HC and then in the International Courts as Cairn Energy knew it would need to look somewhere else, outside India for help.

The Permanent Court of Arbitration gave a verdict in the favour of Cairn Energy and guess what? It also ordered the Government of India to pay back $1.4 Billion as compensation for the assets of Cairn Energy that it had seized. Government of India didn't accept the decision which led to Cairn Energy almost (literally almost) seizing the Indian Government Assets in foreign countries like France, USA, UK, Canada, etc.

Now just imagine, how ridiculous and how serious a matter could be when a company goes on to seize the assets of a government. And not just any government, Indian Government. Company seizing assets of the government!

Let that sink in for a moment. And all of that just because the government wanted to get back the tax from Vodafone via Retrospective Tax.

It's no less than a joke and thus a few days back, finally, the Indian Government abolished the infamous Retrospective Tax. FM Nirmala Sitharaman mentioned that the Retrospective Tax would finally be put to an end and the corporates will not need to pay any taxes for the deals that happened between 1962 and 2012 before the law was brought in. However, Corporates would still need to pay taxes on such offshore deals after 2012 as it is a normal law now.

The FM also said that the government is also ready to return the taxes which it had collected under this law provided that the corporates take it without demanding for interest for the said period. Under the abolishment amendment, the government will refund ₹8,100 crore collected in a 2012 retrospective tax law on indirect transfer of Indian assets prior to May 28, 2012.


The end of Retrospective Tax would definitely impact Indian Economy in a positive manner. Foreign Investors would now be less concerned with no such law in place. The current government that promotes itself as the government that invites business and promotes them, would surely get an upvote as this move would promote business activities from foreign countries. Let's hope that the end means a new beginning for a brighter future for India and its economy. Till then,

That is it for this week's FinMail. Happy Independence Day 🇮🇳 to us all. Keep learning and keep spreading love. We will see you in the next week.


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