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Over the years, “retroactive tax”, these two words have harassed foreign investors who were eyeing India, leading to multiple disputes between the Indian government and major international companies such as Vodafone and Kern. The government on Thursday introduced a bill in Lok Sabha to repeal the controversial tax law.

But why did India introduce such a law?

In May 2007, Vodafone bought a majority stake in Hutchison Whampoa for $11 billion. The Indian government has filed a claim for Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have withheld the tax at source before any payment was made to Hutchison.

After losing an appeal to the Bombay High Court, Vodafone won the High Court case, which ruled in 2012 that the group’s interpretation of the Income Tax Act 1961 was correct and that it did not have to pay any tax on interest for the purchase.

Then Finance Minister Pranab Mukherjee circumvented the Supreme Court ruling by proposing an amendment to the Finance Act, giving the IT department retroactive taxation power, and enabling the IT department to pursue mergers and acquisitions (M&A) on all offerings. Going back to 1962 if the primary origin is in India.

Vodafone invoked the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995 and began arbitration against India at the Hague Court of Arbitration in 2014. In a unanimous decision, the court ruled that India had breached the terms of the agreement and that it should halt efforts to recover said taxes.

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Similarly, Cairn UK transferred shares of Cairn India Holdings to Cairn India in 2007 as the tax authorities imposed a tax claim of Rs 24,500 crore alleging that Cairn UK had made capital gains. Kern refused to pay taxes and challenged India’s position in an arbitration court.

The court ruled in favor of the UK-listed company and ordered the Indian government to pay Kern $1.23 billion in compensation in addition to costs and interest. The company, which previously said the ruling was binding and enforceable under international treaty law, has since sued Indian government officials to pay the money. But the government will not pay.

Cairn has identified high-quality Indian government assets in the US, UK, Canada, Singapore, Mauritius, France and the Netherlands for the award application. It was recently ordered to uphold the confiscation of 20 Indian state property in the United Kingdom. The government, for its part, has confirmed that it will challenge the French court’s order and will fight hard in arbitration.

The government has now proposed returning the entire principal amount, under certain conditions, to the litigants. Companies will have to withdraw and make representations that they will not claim any compensation for cost or benefits.

“In recent years, there have been major reforms in the financial and infrastructure sectors that have created a positive investment climate in the country. However, this retrospective adjustment and emerging demand are still a pain point for potential investors in some cases. The country stands today. At the time when Where there is an urgent need for a rapid economic recovery from the COVID-19 pandemic, foreign investment plays an important role in promoting rapid economic growth and job creation.”

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“This decision helps clarify our position with investors,” Tarun Bajaj, Minister of Revenue at the Ministry of Finance, told a news channel.

Experts say the current move to scrap the tax retroactively will eliminate pending lawsuits and restore India’s credibility as an investment-friendly decision.

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