Welcome move: An unfair tax is gone

The government has done well to amend the Income Tax Act, 1961, to do away with the controversial 2012 provision that empowered it to impose a tax retrospectively, which has earned the country much infamy. It had also raised the prospect of humiliation in the international arena with the seizure of Indian assets by courts to pay off the country’s liability to foreign companies. The amendment will put an end to 17 cases in which such demands have been raised, including the disputes with Vodafone and Cairn Energy. Cairn has started enforcing the international award in its favour on its claim of $1.75 billion from the Indian government. The amendment retains the original intent of making the sale of holding companies abroad, whose value arises from economic activity in India, liable to capital gains tax in India, but makes it prospective with effective from May 28, 2012, when the 2012 amendment came into force.

This should have been done long ago, especially because the BJP had itself called the 2012 amendment “tax terrorism’’. Unfortunately, it stuck with it when it came to power in 2014 and has since defended it in public and in courts and arbitration forums. Finance Minister Nirmala Sitharaman said the government was waiting for the cases to reach their logical conclusion. But the conclusion was clear many months ago, and it is only now that the government has found that the amendment was “bad in law and bad for investors’ sentiments”. It is likely that the government finally retracted because the Cairn case put at risk the Air India divestment and may have led to the seizure of Indian assets in France. This can be inferred from the statement of Finance Secretary TV Somanathan that India was only choosing to end the tax disputes and not giving up its right to tax. Even now, the government has said that it will pay back the capital gains tax collected but will not entertain any demand for penalty or interest. It is to be seen whether Cairn will agree to forgo the interest and damages awarded to it. But there may be scope for compromise now. Vodafone, which is in deep financial trouble, might welcome the move, but it will not be enough to rescue it.

The unfair idea of retrospective tax, which should not have had a place in the tax system, has rightly been put to rest. It had badly affected the country’s business-friendly image. Sitharaman has hoped that the government’s decision will give a boost to foreign investment. But the government will have to prove more convincingly and over a period of time that it is committed to stability and consistency of policy.