Income Tax Taxation

Explaining the Taxation Laws (Amendment) Bill, 2021

Recently the Taxation Laws (Amendment) Bill 2021 was passed in the parliament, which intends to do away with retrospective tax provision and end retrospective taxes imposed on indirect transfer of Indian assets made before 28 May 2012. In this article, we shall discuss the main aspects of this bill and will also look at what led to tabling of this bill.

Retrospective Tax Law- History in Brief

In 2012 the Supreme Court of India gave a verdict that gains accruing from indirect transfer of Indian assets are no taxable under the present provisions of the Income Tax Act 1961^[1]. The provisions of the Income Tax Act were amended by the Finance Act 2012, with a retrospective effect and overturned the verdict of the Supreme Court. It clarified that gains arising from the sale of shares of a foreign company is taxable in India if the shares, directly or indirectly derive its value substantially from assets located in India.

The Finance Act 2012 amendments gave rise to criticism from stakeholders concerning the retrospective effect given to the amendments. Arguments were made that the retrospective amendments are against the principle of tax certainty and can damage the reputation of India as an attractive destination.

The retrospective clarificatory amendment was a sore point with potential investors. The amendments led to widespread criticism of the retrospective levy. The amendments also caused the commencement of arbitration proceedings against the Indian government under different Bilateral Investment Protection Treaties. There were cases where huge international arbitration award holders initiated execution proceedings against the assets of the government of India in different countries.  

Taxation Laws (Amendment) Bill 2021: Key highlights

Some of the key highlights of the Taxation Laws (Amendment) Bill 2021 are as follows:

• The bill seeks to withdraw tax demands made under  retrospective legislation 2012 to tax the indirect transfer of Indian assets;
• The bill has proposed that any demand raised for indirect transfer of the Indian assets made prior to 28 May 2012 would be nullified on the fulfilment of specified conditions. These conditions include withdrawal or furnishing of an undertaking for withdrawing pending litigation and furnishing an undertaking to an effect that no claim for cost, damages, interest will be filed.
• The bill also proposes to refund amount that is paid in these cases without interest.
• The bill also proposes to amend Finance Act 2012 to provide that under section 119 of the Finance Act 2012, validation of demand, will cease to apply on the fulfilment of certain conditions. These conditions are as follows-
  1. Where the person filed any appeal in an appellate forum or any writ petition in the High Court or in the Supreme Court against the order in respect of the income, he shall withdraw or submit an undertaking to withdraw the appeal;
  2. Where the person initiated any proceeding for arbitration or conciliation or gave a notice thereof under any law being in force or under any agreement entered into by India with any other country or territory outside India, for protection of investment or otherwise, he shall withdraw or submit an undertaking to withdraw the claim;
  3. The person will furnish an undertaking waiving his right to seek or pursue any remedy or claim in relation to said income which will be available to him under any law being in force, in equity, under any statute or agreement entered into by India with any country; and
  4. Such other conditions as may be prescribed.
• The bill provides that the issue of taxability of gains arising from assets transfer located in India through the shares transfer of a foreign company was a subject matter of protracted litigation.

Retrospective Taxation-

It permits a country to pass a rule on taxing products, items or services and deals and charges companies from a time behind the date when the law is passed. Countries use this method to rectify any shortcomings in their taxation policies that have allowed companies to take advantage of the loopholes.

Retrospective taxation hurts companies that either knowingly or unknowingly interpreted tax rules in a different manner. There are countries such as the US, UK, Canada, Belgium, Australia and Italy that have taxed companies retrospectively.

What is the significance of the Taxation Laws (Amendment) Bill 2021?

The significance of the Taxation Laws (Amendment) Bill 2021 can be summarised as follows:

• The bill is expected to address the long pending demand of foreign investors seeking removal of the retrospective taxation for improved tax clarity.
• It is also expected to establish an investment friendly business environment which can enhance the economic activity and help in raising more revenue over time for the government.
• It can help in improving the ease of doing business.

Conclusion

The clarificatory retrospective amendments didn’t go well with the potential investors therefore, the government of India introduced the Taxation Laws (Amendment) Bill, 2021 to propose cancellation of the amendments. We are living in times when there is an immediate need for quick recovery from the Covid-19 pandemic, and foreign investment has a crucial role to play in extending economic recovery and growth.

Read our article: Key Implications of the Taxation Bill 2020 on ITR Filing