India: No More Retroactive Taxation

Last week, the Indian government decided to repeal a controversial law that imposed retroactive taxes on multinational companies, which had sparked several legal disputes worth billions of dollars. There is no doubt that this is a positive step in the right direction, which corrects a long-standing injustice and will ultimately help improve the business climate in the South Asian country. The move is expected to help the government get rid of lawsuits brought by various companies, including Vodafone and Cairn Energy, against claims for tax backlash.  It is also expected to help reassure investors who still have concerns about the stability of the regulatory environment in India, due to the sudden adoption of this law. The government has submitted the 2021 Tax Laws Bill to parliament, which will abolish the tax retroactively on the indirect transfer of Indian assets before May 2012. The origins law was retroactively introduced in 2012 by the previous Congress-led coalition government. It was adopted amid many reservations within the government at the time. The opposition went so far as to describe it as “tax terrorism,” but the bill passed nonetheless. It immediately frightened foreign investors and cast doubt on the stability of India’s regulatory environment. It was seen as very controversial legislation, and has dominated discourse about the country’s investment climate ever since. When Narendra Modi’s government came to power, it declared that it had no intention of enforcing the law, but it did not go so far as to repeal it. The government also inherited all the judicial disputes that erupted because of it, at a time when major companies resorted to the judiciary in order to file lawsuits against tax claims amounting to billions of dollars. The amendment of this law is now seen as a major step in alleviating the fears of foreign investors, as it should help resolve at least 17 disputes related to tax payments exceeding $6 billion. Amending the law now represents a way to evade court rulings issued against the government in two international tribunals. Last month, a French court allowed a freeze of $20 billion of Indian government holdings in Paris to enforce a $1.2 billion ruling in favor of the British oil company, Cairn Energy. In another case, Vodafone, the international telecommunications giant, won a lawsuit filed in an international court, which ruled that the Indian authorities’ demand for taxes in excess of $2 billion is illegal. In any case, the amendment of the law comes at an opportune time, after the Indian economy has been badly affected by the coronavirus pandemic. Currently, great efforts are being made to revive the economy, as the government seeks to attract foreign investments into the country. Now, with the retroactive tax eliminated, attention could shift to the reforms that the government was promising to enact in order to boost the economy. This includes steps such as production-related stimuli. Considering that India is pinning its hopes on bringing foreign mega-projects into the country, there is no doubt that the abolition of this law will be beneficial for the Indian economy in the long run. – Dhikr Al-Rahman (translated by Asaf Zilberfarb)