 Hello viewers, retrospective taxation is a burning issue and government has introduced a bill in the Lok Sabha to silently withdraw the retrospective taxations and we at Shankara AS Academy thought this is the right juncture to discuss about the retrospective taxations and this is also an important aspect from the exam perspective and our team has decided to bring this out as a separate video for the benefit of the students and in this video we will be discussing about the retrospective taxation capital gains taxation and bilateral investment treaties and what is the relation between all these three and we will also trace back the roots of the issue that is to Vodafone case the Keyron energy case and we will also be discussing about the bill introduced in the Lok Sabha and implication that it will have on the business environment. See this FAQ discussion we are going to discuss two three concepts and I've also included some stories in between so that you will understand the concepts better at the same time it remains interesting but this entire discussion is going to be very much valuable for your preparation alright now pay attention so this FAQ is important from the perspective of India's investment relations with other countries the FAQ talks about a recent decision of government regarding retrospective taxation regime in our country so today let us understand what is this retrospective taxation and the decision regarding it and also about bilateral investment treaties which is all commonly called as BITS okay so here is the syllabus relevant for this segment see Indian government has decided to nullify the retrospective taxation see what is this retrospective taxation first see at 2020 say for example the government decides that they have to tax something so imagine they wanted to tax the Biryanis okay so what they do is at 2020 they pass a legislation saying let's tax Biryanis but the clause that they keep is any Biryani consumed after 2015 will be taxable so here from 2020 to 2015 all the Biryanis sold will be taxed so it is not from 2020 to 2025 it is not such but 2015 to 2020 and there on all the Biryanis that is being consumed will be taxed so when the tax law is applicable to a previous date it is called as retrospective taxation whereas when the tax law is applicable from the date to the upcoming days then it is called as prospective taxation all right so retrospective taxation is where a 2020 law probably imposes a tax say from 2015 or 2016 and that is what is called as retrospective taxation all right and this decision by Indian government recently is a result of careful deliberation only but why to nullify this retrospective taxation because India faced backlash in the international arena and regarding its draconian retrospective taxation this backlash was a result of the disputes that arose out of BITs that India has with other countries see why is this retrospective taxation bad because we'll assume one Biryani is hundred and we'll end up having the Biryani and that is how we would have planned our income and the expense and in 2020 and all of a sudden the government decides to tax so the Biryani that we ate in 2015 from hundred it has been pushed up to say 150 say 50 rupees we're going to pay us tax so we'll end up shelling out the money that we have right now for an action that we have already completed based on some kind of planning right so a retrospective taxation creates an environment of uncertainty remember that so consider it for a business also say it is trying to tax a business transaction that was carried out previously so the business entity might have a budget sorted out and because they have to pay tax all of a sudden they'll have a huge set back in their business as well and that is exactly why retrospective taxation could be bad it creates a atmosphere of uncertainty especially for the businesses alright and in the current context let us understand the issue beginning by understanding what are the bilateral investment treaties and what are the retrospective taxation issues associated with this particular concept alright see conventionally bilateral investment treaties are treaties between two countries which are aimed at protecting the investments made by the investors of both the countries imagine two countries we have India and UK there are two countries and say a UK company is trying to invest some one million into India and that one million needs to be protected isn't it because India should not tax it extensively or India should not place unfair obligations on that particular one million just to protect that particular investment these kind of bilateral investment treaties are signed so basically it will involve conditions expropriating investments imposing obligations on whole states to accord fair and equitable treatment to the foreign investments and then allowing for transfer of funds subject to conditions given in the treaty and if you see most importantly BITs allow individual investors to bring cases against the whole states if the whole states sovereign regulatory measures are not consistent with the BIT so such cases are disputes cover wide array of sovereign regulatory measures what is sovereign regulatory measures say India is a sovereign country and India will have some kind of regulations for doing business in its own soil and this is what is called as sovereign regulatory measures so these cases cover a wide array of sovereign regulatory measures which are challenged by the foreign investor as potential breaches of the investment treaties or the bilateral investment treaties and these include whole states environment policy monetary policy and policies related to taxation as well say environment policy might not allow the UK investor to do business which will not be a fair condition so in that case a BIT will be a protection for that particular one million brought in by the UK investor into the India now in the instance of such cases if the foreign investor is successful in the claims against the host state then the investor state dispute settlement process comes into play see the investor state dispute settlement process involves arbitral tribunals which could order the host state to pay monetary damages to the foreign investor see host state is nothing but that state that is receiving the investment okay so the ISDS process involves arbitrary tribunals which could order the investment receiving state to pay monetary damages to the foreign investors so you may ask what about India see after India adopted economic liberalization in 1991 India initiated an extensive BIT program so it wanted to become a more attractive investment destination so a new BIT program was formulated and it was launched and was first first signed with United Kingdom in 1994 and note that in India BITs are also known as bilateral investment promotion and protection agreement and later India drafted the 2015 model Indian BIT for adhering with the relevant international precedents and the practices and its objective is to provide appropriate protection to the foreign investors in India and the Indian investors in the foreign country while maintaining a balance between the investors rights and the government obligations see when we are talking about protecting investors it is also true that the investor also has some obligations to the government see it has to pay the taxes and India might have some environmental laws and the investor should abide by the environmental laws and this aspect is also covered by the BIT and this objective clearly states that Indian agenda behind the BITs and so overall what are the benefits of BIT so let's see one by one first is the benefit to the investor right so the treaty increases the comfort level and boosts the confidence of the investors as it assures a level playing field and a minimum standard of treatment and a non-discrimination in all matters is ensured by these BITs alright and additionally it also provides for an independent forum for dispute settlement by arbitration and next to the host country the benefits are that the above mentioned helps to project India as a preferred foreign direct investment destination as well and apart from that it also protects the outbound Indian FDI that is the Indian investors like the big players may also invest outside India so the BTIs also protect these investors and also by providing a more open and secure environment for investments BITs also promote private sector development right so keep these in mind now let us talk about the retro specter tax that is involved in this particular issue see this refers to a 2012 amendment of income tax act which enabled a tax demand by the government under section 9 plus 1 of the act see the tax demand mentioned here is the capital gains tax so let us quickly understand what is capital gains tax see capital gains is any profit that arises from a sale of a capital asset imagine you are buying a land for 1 lakh okay and after 2 years the price of the land becomes 4 lakhs so the net gain for you will be 3 lakhs from that particular capital asset and the profit of 3 lakhs is being taxed and that is what is called as capital gains tax so generally the taxes paid in the year in which the transfer of the capital takes place and this is also of two types it is called as short term capital gains tax and the long term capital gains tax a short term capital gains tax happens when it is under 36 months whereas a long term capital gains tax happens when the transaction takes place after the 36 months and this is also true for the shares that we buy in sale as well so that is an entirely different discussion but just understand this is what is capital gains tax so the tax demand in the issue we are discussing is a capital gains tax so under this section the government was enabled to generate tax demands on a certain income so this is the income through or from the transfer of an asset or a capital asset situated in India pay attention it is situated in India then that is when the capital gains tax comes into play and this income is a consequence of a transfer of a share or interest in a company or an entity that is registered or incorporated outside India so understand this this means the offshore deals resulting in income through transfer of capital assets situated in India will be taxable so imagine there is a land in India say somewhere in Delhi and two individuals are exchanging money for an asset situated in India and this particular transaction even if it does not take place in the Indian soils this particular transaction for that particular land situated in Delhi will also be taxable all right and the main issue with this amendment was it was made applicable retrospectively we saw what is retrospectively right so this means it was applicable even to a retrospective event that is a past event and that is why it is known as retrospective tax so you should remember that such retrospective taxes are against the principle of tax certainty and what is tax certainty so a business ventures into one particular area thinking that the tax is 10 percentage but all of a sudden the government keeps changing the taxes say it increases to 15 it increases to 20 so it will try to manufacture a product at one particular price when the tax keeps increasing the price of the goods also go on increasing and the demand for that particular goods will subsequently get affected so the entire business depends on the tax that they pay on the government as well so say if a government says 10 percent is a taxation it should remain so for some considerable amount of time if not if it keeps changing these kind of tax rules it'll adversely affect the business environment and this is what we call as principle of tax certainty that is the business is certain that some amount is the tax always and apart from that this kind of move by India also damages India's reputation as an attractive destination for investment so why such an amendment see it is said that the Indian government brought this amendment to justify its demand of capital gains from Vodafone for buying a controlling stake in another company in 2007 so controlling stake means holding majority of a company's voting stock and see in 2007 a Vodafone bought Hutch so you may remember Hutch the small dog who runs up behind the owner in all the ads remember so Vodafone bought Hutch controlling stake in the subsidiary company called Hutchison Essar okay so Hutchison Essar was a telecom business it was based in India only and the transaction that took place then in 2007 between Vodafone and Hutch was about 10.9 billion US dollars okay and the transaction took place in the Cayman islands where Hutch had another unit called the CGP investments and the CGP was based in Cayman so that is why they made the transaction there and now the controlling stake was acquired by the Vodafone subsidiary again and this Vodafone subsidiary was in Netherlands and it is called as Vodafone's international holding so after acquiring the stake what happened was the Hutch was renamed as Vodafone India Limited so after the transaction that took place in Cayman Island the Vodafone bought Hutch and Vodafone after buying the Hutch in India renamed the Hutch that was originally it was to Vodafone India so here the transaction happened between the companies in the Cayman Island and Netherlands but the impact was in India because the Hutch transformed into Vodafone India so by the item which was sold and bought was a company based in India so we can see that the sale of telecom business was through complex web of subsidiaries across the countries so Cayman Islands was involved Netherlands was involved and India was involved right and this 2007 transaction escaped the capital gains tax in India because it didn't happen in Indian soils it happened in offshore deals but the income tax department saw this so it didn't take it easy and what happened was it brought an amendment which made the offshore deal taxable in India that too with a retrospective applicability that is it amended the law to tax the deal that happened previously so Vodafone opted for international arbitration against the Indian government under the India Netherlands bilateral investment treaty and this Vodafone challenged it in the permanent court of arbitration at the Hague and the case went against India as the permanent court of arbitration ruled that the retrospective legislation was in clear breach of the guarantee of fair and equitable treatment that was guaranteed under bilateral investment treaty and the tribunal also directed India to reimburse about 4.3 million pounds along with 3000 euros as a legal cost to Vodafone so totally it was about 1.7 billion dollars so India had to pay and it didn't stop that was not the only issue India also raised similar claims with Kairan energy limited and many other countries as well and the verdict of this came in 2020 regarding the Kairan energy and this verdict was against the Indian government as well and the PCA held that the tax demands against the Kairan energy is inconsistent with the BIT so it relieved the company from the obligation of paying the taxes but the Indian government in utilize the continuing effect of the demand by permanently withdrawing the demand that is it should not tax anything retrospectively then that is the condition that was laid down by the PCA all right and it ordered the Indian government to pay up over 1.2 billion in damages plus interest and the legal cost so this again here India had to pay so the Indian government did not stop with these two companies similar claims were raised in 17 other such cases but these two were the cases where the companies went for international arbitrations under the PITs and these two cases led to huge loss to the Indian government and even though the verdicts have been appealed now the government has taken this progressive step so what is the step the Indian finance minister has introduced the taxation laws amendment bill in the Lok Sabha so what does the bill say the bill aims to do away with the retrospective taxation on the sale of assets in India by the foreign entities the sales of which were executed before May 2012 so the government will also refund any taxes that were being paid under this particular law and this particular move has been hailed by many that is many have appreciated this particular move and the limitation is that the companies that will benefit from the amendment they must withdraw all the legal cases against the government and they should also forfeit interest cost and any damages so this is the limitation under this particular act so in essence what we saw was the move by the government and why did the government come to this particular move and what is retrospective taxation and what is the Indian history with the retrospective taxation and how far we have gone to collect the taxes and what were the consequences we saw all these in this particular discussion so this brings us to the end of the FAQ so we just have to wait and see whether the companies agree to these limitations so I hope that discussion gave you a good idea about the retrospective taxation issues use this information in your examination and stay tuned with us for the daily news analysis and we also give out weekly capsules powered by Srinivasan sir who is a former diplomat and also a IFS officer from 1967 batch let's wrap up our discussion today good day