THE EMERGENCE & WITHDRAWAL OF RETROSPECTIVE TAXATION - Oikantik Sinha

On 3rd November 2021, the UK-based oil and gas exploration giant Cairn Energy Plc announced that it would drop all its current litigations against the Indian Government. These litigations would have allowed the company to seize the Government of India's assets in various countries such as the UK and France, as settlement of an ongoing tax dispute between the two parties. 
The question that now arises is why these litigations were made in the first place and how was the matter resolved. To answer this, we must look back at the Union Budget of 2012, where the provision for retrospective taxation was added via an amendment to the Finance Act.

How did retrospective taxation emerge?
During the years 2006-07, Cairn Energy had sold a section of its shares in Cairn India Limited via overseas transactions to entities such as Malaysia’s Petronas and the Vedanta Group as part of a reorganization process before its IPO launch. A similar transaction during this period was Vodafone's acquisition of a controlling stake in Hutchison Essar, which had occurred in the Cayman Islands. 
Since these transactions happened overseas, the Government of India was unable to levy taxes at the source and hence it introduced the retrospective taxation provision in 2012. This provision would allow the government to collect taxes on capital gains earned during the sale of shares in a foreign company, provided that the shares derived the majority of their value from assets located in India. This provision also allowed the government to collect dues on any such transfer of shares that had happened since the year 1962.
Following this event, the government of India seized 5% of Cairn’s stake in Vedanta, withheld tax refunds close to $223 million in value, and seized dividends worth $159 million due to the company.

What led to the withdrawal of retrospective taxation?
Unsatisfied with this outcome, Cairn Energy appealed to an Investor-State dispute settlement tribunal that the Indian Government violated the India-United Kingdom bilateral investment treaty. The tribunal ruled in favor of Cairn and reasoned that the retroactive nature of this tax was not in line with International Law. Since Cairn wasn't allowed to plan its reorganization activities accordingly, the Indian Government should not be able to levy taxes on capital gains from such transactions. Hence the tribunal asked the government to refund over $1.2 billion, which it had collected in the form of retrospective taxes from Cairn. A similar arbitration was also won by Vodafone at the Permanent Court of Arbitration at the Hague. The retrospective taxation provision was also met with criticism around the world, and several appeals were made by investors to repeal this provision.
All these factors could have possibly contributed to the Indian government now withdrawing this provision and it is expected to settle claims worth $14.8 billion made against it by firms such as Cairn Energy, Vodafone, Sanofi, and SABMiller. 

Future Impact
I believe that the withdrawal of the retrospective taxation amendment was a very necessary step to help further India's growth and development objectives. It will now be interesting to see if this step will help restore the faith of international investors in India and make the country a more attractive investment destination in the future. 
Moving forward the government should try to establish more clarity and keep investor sentiments in mind in its policy-making decisions. This would go a long way in improving the ease of doing business in India which is crucial for the country in the present economic scenario.