DEATH OF THE BAD TAX 

Recently the government of India has buried one of the worst taxation amendments which the previous UPA govt has introduced in the budget 2012 to retrospectively tax the indirect transfer of Indian assets. Yes, we all are aware of this infamous case between the VODAFONE v/s INCOME TAX DEPT. 

The case is very complex and is often very difficult to understand even for a commerce graduate however I will try here to simplify it and summarize it to give a crux as to what all has happened in this case which has got a huge embarrassment to India to make in India and do business in India policy and had shaken the confidence and trust of the corporates who wished to do business in India. So here is a quick summary of this case :

  1. The case is related to tax demand generated by the Indian income tax authorities on Vodafone related to a stake sale outside India with Hutchison ltd. in the year 2007.
  2. Vodafone challenged the decision of ITA and won the case from the supreme court resulting in no tax liability.
  3. The Indian govt took this decision as an issue of prestige and made a retrospective amendment in the income tax act 1961 in the year 2012 resulting in a fresh tax liability of Rs 6700 crores of a capital gain on Vodafone.

Let me first define what retrospective taxation means. Retrospective taxation is a kinda tax that allows the govt to tax certain items applicable from a previous date i.e. before the date on which the law is being passed. This results in the fresh tax liability for the taxpayers involved in the items on which retrospective taxation is applied.

This is often not entertained by the people because it is not fair play from the perspective of the taxpayers as when we enter into a transaction all the rules should be first well defined so that the person undergoing the transaction has full knowledge of his financial liability arising out the transaction. But when you retrospectively tax a particular transaction then it means new rules are applied to a game that is already over and as a result of new rules the outcome of the game changes, which is foul play.

The get over this blunder made in the past, the GOI has recently introduced the taxation laws(amendment) bill, 2021 in the parliament. The bill proposed to nullify the contentious retrospective tax law by amending the income tax act 1961. 

According to the new amendment tax claims made on offshore transactions before 28 may 2012 will be nullified. The govt has also proposed to refund the amount paid in litigation by the companies without interest thereon. The government sources had made it clear that this move is made to send a positive message to the investor community. 

After analyzing the above case here are my few takeaways about the above subject which I have summarized in points mentioned below:-

  1. The retrospective amendment was not a good move from the Indian government as it caused reputational damage to India in the eyes of foreign investors and companies 
  2. The rules of the game should be known at the beginning and any changes thereafter in the rules are considered as cheating, which according to me happened in this case.
  3. The supreme court of India held its head high by purely deciding based on law, which according to me is a win for our judiciary system and restores the faith that what is fair and right will win.
  4. NDA govt took a bold step to eradicate this unfair law giving a message to the global investors we have realized our mistake and no such tax shall be levied in the coming future giving a sense of stability and ease of doing business for prospective global companies.

~Abhishek Jain

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