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In 2012, the government controversially changed tax laws retrospectively. International companies which had acquired assets of Indian companies before then were told they had to pay huge amounts.
Taxes on the indirect transfer of Indian assets before May 2012 would be "nullified on fulfilment of specified conditions", such as the withdrawal of litigation and an undertaking that no damages claims would be filed, a government statement said.
Today's decision will allow the companies involved in disputes over retrospective tax to refunds without interest and costs. It could provide large relief to Vodafone, whose stock has crashed this week. The telecom owes Rs 22,000 crore to the government as payment for license and spectrum fees. All major telecoms lost a bid recently in the Supreme Court to change how those dues were calculated.
This week, it emerged that Vodafone promoter Kumar Mangalam Birla had written to the government asking that it take over his Aditya Birla's 27% stake in the debt-saddled telecom. After Mr Birla resigned as non-executive chairman of Vodafone on Wednesday, shares fell to their lowest in over a year.
An international arbitration tribunal in The Hague last year ruled that India's $2 billion tax claim on Vodafone was incorrect, and that it breached an investment treaty between India and the Netherlands. The tax demand against Vodafone will now stand invalidated.
Cairn, which has oil and gas operations in India, was awarded damages of more than $1.2 billion, plus interest and costs, in December by the Permanent Court of Arbitration at The Hague after a lengthy tussle with the Indian government. "Retrospective tax "has been a weight on the shoulders of India", this new move is a very positive signal for foreign investors," said Uday Walia, one of the lawyers who has represented Cairn, to NDTV
Last month, a French tribunal ordered a freeze on some 20 centrally located properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn.
Cairn Energy had also sued Air India in a US court as part of its efforts to enforce the $1.2 billion award that it had won in international arbitration. The company said that Air India should be made liable for the government's dues to it.
Revenue Secretary Tarun Bajaj told NDTV that it is "unfair criticism to say that we have done this under pressure because of Air India assets being claimed... this would have been a long battle, but we decided for the best interests (of all) and investors".
India has been caught in more than a dozen such cases against companies over retrospective tax claims. The controversial retrospective law was introduced by the previous Congress-led UPA government, but the tax cases that were filed by it were pursued by the BJP government.