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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.
Table of Contents
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. 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.
Some of the key highlights of the Taxation Laws (Amendment) Bill 2021 are as follows:
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.
The significance of the Taxation Laws (Amendment) Bill 2021 can be summarised as follows:
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
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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