Explained: Centre set to scrap retrospective tax; all you need to know about this controversial law

It is an additional charge on the transactions done in the past. It is usually charged in cases where the present-day policies differ vastly from the past and it is felt that the tax paid under the old policy was less.

It was introduced by the UPA government in 2012 to impose a tax on capital gains made by companies retrospectively.

Under the law, a company that has followed all rules in the past can still be penalised. This disrupts prudent financial management and deters foreign businesses from investing in India.

The UPA government used the retrospective tax law against Vodafone in 2012 for buying Hutchison Telecommunication's stake in Hutchison Essar. Two years later, the tax was once again used against Cairn energy for an internal corporate restructuring carried out in 2006.

As per the Taxation Laws (Amendment) Bill, 2021, the tax raised for the indirect transfer of Indian assets before May 2012 would be "nullified on fulfillment of specified conditions".

The government proposes to refund Rs 8,100 crore paid as retrospective tax, of which Rs 7,900 crore will be paid back to Cairn Energy.

Last month, Cairn Energy secured an order from a French court to freeze India’s assets in Paris. The court overturned the retrospective tax demand raised by India and ordered a refund of the shares sold, dividend confiscated and tax refunds withheld.

The new legislation, say experts, has been brought in time to prevent the company from confiscating India’s overseas assets.

The message of the new legislation is loud and clear — India is ready for course correction if needed. By scrapping this law, the Centre expects greater foreign investment in the country.