Government amends Income Tax Act; retro tax demands nullified

The bill's Statement of Objects and Reasons reads, "The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour... Foreign investment has an important role to play in promoting faster economic growth and employment... Retrospective clarificatory amendment and consequent demand created in a few cases continue to be a sore point with potential investors."

It is noteworthy that an international arbitration tribunal in The Hague last year ruled that India’s imposition of tax liability on Vodafone, as well as interest and penalties, breached an investment treaty agreement between India and the Netherlands

Anuradha Dutt, the counsel for Vodafone reacted to the news and told CNBC-TV18, “I am really happy that government has decided to do this. I think it also sends a strong signal that government is willing to look at some mistakes that may have been made earlier and are, looking to foreign investors, listening to them and they want foreign investors to come in. So they are going to respect rule of law. I think it is a very, very significant and good thing that has come about."

How will this impact the government's coffers? Reacting to the news, tax expert Dinesh Kanabar told CNBC-TV18 that Vodafone Idea has not paid the tax department any money in retrospective tax demand and so no thus refund will be required. However, India might have to refund money collected from Cairn India.

According to the bill, if any recovery has been made, the amount will be refunded, albeit without any interest, and the government will not pay any cost damages, etc.

"Obviously, this is provided for the Cairn matter where the arbitration award speaks about costs and damages, and the government clearly does not and should not be asked to pay damages. But clearly, if the amounts are refunded to the people who have paid thus far, we have taken a significant step forward a very, very welcome step as I would say,” assessed Kanabar.

According to Finance Ministry sources, the govt is assessing the implications of paying back Rs 7,900 crore to Cairn Energy as the company looks to seize the Indian govt's assets abroad to recover USD 1.2 billion compensation award.