The government is likely to modify the controversial retrospective amendments to the Income-tax Act and make them prospective, justifying the move as a necessary measure to improve investment sentiment.

The 2012-13 budget amendment that overturned a Supreme Court judgment in the Vodafone tax case has been singled out for undermining investor sentiment and was often cited as an example of India's aggressive tax regime.

The retrospective amendment was clarificatory in nature that said any foreign transaction that resulted in direct or indirect transfer of an asset located in India was liable to tax in the country.

This likely move will bring relief to British telecom major Vodafone and many other foreign companies that face tax liability running into thousands of crores of rupees because of the backdated modification in the law from 1961 when the Income-tax Act came into force.

The only hitch in making the law prospective is that the BJP had not opposed the amendment when the budget for 2012-13 was passed, but government officials said the move could be justified in the larger interest of an economy that needs foreign capital to fund the creation of infrastructure and finance the current account deficit.
"This needs to go... It has created huge uncertainty for foreign investors," said a senior government official. The final decision will be taken by finance minister Arun Jaitley. He has, in the past, been known to oppose any retrospective changes in law but it remains to be seen what position the government takes on the issue.

Former FM and now President Pranab Mukherjee had amended Section 9 of the Income-tax Act, 1961 in the 2012-13 budget retrospectively from the day of the commencement of the Act, sending a shockwave through the investor community.

The amendment was prompted by an adverse Supreme Court decision that overseas transactions that involved Indian assets could not be taxed. Indian tax authorities had sought to impose a principal tax liability of Rs 7,899.9 crore on Vodafone for failing to deduct tax on its $11-billion payment to Hutchison Telecommunications International for the acquisition of Hutchison Essar.

Vodafone moved court saying that the deal was done overseas and couldn't be taxed and eventually got a favourable verdict from the Supreme Court.

Soon after the amendment was made, Vodafone served a notice for international arbitration under the India-Netherlands bilateral investment promotion and protection agreement.

Though government attempted conciliation, the company's insistence on inclusion of another tax dispute relating to transfer pricing derailed the talks.

The Union Cabinet in April decided to withdraw the offer for conciliation, paving the way for raising the pending tax demand on the company. The government has to appoint an arbitrator by June 15 in response to the company's latest arbitration notice.