Retrospective tax: Global investors cheer as India scraps policy

The law has been a major sore point with foreign investors

India has introduced a bill in its lower house to scrap a controversial 2012 law that retrospectively levied capital gains tax on companies for the indirect transfer of their Indian assets.

The law, which will now apply only prospectively, has been a major sore point with foreign investors for the better part of the last decade, damaging India's reputation as a stable tax jurisdiction and leading to protracted litigation.

"It is perhaps the boldest move taken in the history of Indian tax laws," said Bijal Ajinkya, Partner at the law firm Khaitan & Co.

The far-reaching, but long delayed decision now paves the way for the government to settle billions of dollars in international disputes.

At least 17 companies, including British oil and gas major Cairn Energy, and the telecom giant Vodafone, will benefit from the ruling.

"Prime Minister Modi inherited this bad legislation, and today we are delighted to see he has finally decided to nullify it," said Mukesh Aghi, CEO and President of The US-India Strategic Partnership Forum.

He called the law a "black mark" on India's reputation as a predictable investment destination.

Tax demands on companies will be nullified under the condition that they withdraw litigation against the government and undertake not to claim interest or damages.

The bill also proposes to refund any principal tax amount they might have paid.

The changes come in even as the Modi government is engaged in a legal tussle with Cairn Energy and Vodafone in international arbitration tribunals.

In the case of Vodafone, the tribunal in The Hague ruled against the government's $2bn (£1.44bn) tax claim.

Cairn on the other hand was awarded damages worth $1.2bn plus costs and interest.

The company has been identifying Indian state assets it can seize including planes of Air India and real estate in Paris, to try and get India to honour the tribunal's ruling after the government filed appeals in both cases.

Cairn Energy is in dispute with the Indian government over a 2014 retrospective tax bill

Cairn Energy has told the London Stock Exchange it was "monitoring the situation", on the new amendments, but both Vodafone and Cairn declined to comment further on the matter.

Some analysts are of the view that even though Cairn may suffer some losses and forgo interest owed, it may settle out of court now.

"If they don't, this could go on, and they may not get to see the colour of their money for many years," Dinesh Kanabar, a leading tax expert told the BBC.

"In the case of Vodafone, there is nothing further to be done, except for the government to withdraw the appeal it has filed against the tribunal ruling in Singapore."

Legal experts say the government, with this decision has now essentially put the ball into the other court.

"Now it depends on companies to come forward," India's Revenue Secretary Tarun Bajaj told Reuters news agency.

But not all legal tussles will disappear overnight.

The government decision to not pay the interest component with the money it refunds to companies, might "push some affected entities to consider continuing with ongoing litigation," said Ms Ajinkya. Many of these cases are long pending, and the tax amounts are sizeable.

But overall, analysts expect the decision to bring back the lost confidence of foreign investors.

"The country today stands at a juncture when quick recovery of the economy after the Covid-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment," the finance ministry said, in the statement accompanying the bill.