Editorial: Belated course correction 

The retrospective taxation, introduced by then Finance Minister Pranab Mukherjee in 2012 as an amendment to the Income Tax Act, proved a costly policy misadventure

Though belated, the Centre’s decision to do away with the retrospective taxation, a controversial baggage of the UPA regime, is a welcome development. The retrospective taxation, introduced by then Finance Minister Pranab Mukherjee in 2012 as an amendment to the Income Tax Act, was a costly policy misadventure whose aftershocks are still being felt. India had to suffer a loss of face following legal defeat in the international arbitration tribunals in the two back-to-back high-profile cases involving Cairn Energy Plc and Vodafone, both British companies. The humiliation must serve as a lesson for the country’s tax regime. Retrospective taxation is not only arbitrary, regressive and bad in law but also has the potential to erode investor confidence and undermine the country’s image. The move had clubbed India with nations such as Pakistan and Venezuela that have faced similar actions by entities seeking enforcement of awards. A smooth, transparent, and predictable tax regime is what is needed for any country to attract foreign investments. With Finance Minister Nirmala Sitharaman introducing the amended taxation laws Bill in the Lok Sabha, seeking to withdraw the tax demands made using a 2012 retrospective legislation on indirect transfer of Indian assets, the ghost of the past is now finally exorcised. In 2012, India had changed its tax laws retrospectively to make them effective from 1962. Using that backdate, it demanded taxation from Vodafone and Cairn Energy retrospectively. In both cases, these companies challenged the demand in the Permanent Court of Arbitration at The Hague in the Netherlands and India lost both cases.

If a country changes its tax laws to make them applicable retrospectively and uses its parliamentary sovereign power to sideline its own Supreme Court, then it will send wrong signals to the global market and potential investors. The decision to scrap the retrospective tax now means that if Vodafone and Cairn Energy withdraw their cases from both Indian and international courts, the government will not only withdraw its tax demand but also refund the amount paid in these cases. The move sends out a clear message to global investors that India will course-correct and make amends to its policies if they are found to be regressive. The decision comes a month after a Paris court accepted Cairn Energy’s plea to freeze $24 million worth of Indian sovereign assets to force the government to cough up the $1.2 billion in damages awarded to it by the Permanent Court of Arbitration. The addressal of the long pending demand of foreign investors for the removal of retrospective tax would go a long way in placing India as a more attractive investment destination with no ambiguity in terms of taxation laws.

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