India proposes to scrap retrospective tax law

India is proposing to scrap a retrospective tax law that had demanded billions of dollars in payments from foreign investors including UK-listed upstream firm Cairn Energy.

The finance ministry proposed a bill in the Indian parliament to remove the law, which allowed the government to demand retrospective payments on capital gains from foreign companies. The bill proposes to nullify tax demands on the indirect transfer of Indian assets undertaken before May 2012 and promises not to reassert the demand in the future. The principal tax amount will be refunded without interest if affected companies drop any pending litigation and promise not to claim damages or interest, it said.

The bill could affect companies including Cairn, which is locked in a dispute with the Indian government over a 102.5bn rupees ($1.4bn) retrospective tax demand case. Cairn said yesterday it is monitoring the situation.

The moves comes just under a month since a French court accepted Cairn's petition to freeze around €20mn of Indian government assets in Paris, to enforce the $1.2bn arbitration award it won against Delhi over the tax demand.

Cairn had also filed a lawsuit against state-controlled airline Air India in May to enforce the arbitration award.

India's previous government retrospectively changed the tax law in 2012 after losing a $3bn tax challenge to UK telecommunications firm Vodafone in the Supreme Court. The uncertainty caused by the law has discouraged foreign investment in India.

By Sathya Narayanan