The Taxation Laws (Amendment) Bill, 2021
Table of Contents
The Taxation Laws (Amendment) Bill, 2021
The Central government introduced The Taxation Laws (Amendment) Bill, 2021 in Lok Sabha on August, 5th 2021 proposes to amend the Income-Tax Act, 1961 and The Finance Act, 2012 with an intent to scrap the controversial retrospective tax as it adversely affected the image of India which discourages foreign investment in India.
Our Finance Minister, Mrs. Nirmala Sitharaman, states in Bill that retrospective taxation remains a sore point for investors. Recently significant reforms have been made in infrastructure and financial areas which, boosts a favorable environment for investment in India. Looking into the current COVID-19 situation in India, it is essential to attract potential global investors for quick recovery of the economy as foreign investment has a central role in promoting faster economic growth and employment. Expert says that this bill will bring back the lost confidence of foreign investors in India and may bring in more FDI inflow.
Aim of this bill
The main object of this bill is to end all retrospective taxes imposed on the indirect transfer of Indian assets. The Rajya Sabha returned the bill on August,9th 2021, amidst a walkout by the TMC, Congress, and DMK. All the tax demands made by the Income-Tax Department on companies like Cairn Energy, Vodafone, and 15 other similar cases using 2012 legislation on indirect transfer of Indian assets before May,28th 2012, shall be nullified on the prerequisite that these companies withdraw litigation against India and undertake not to claim any interest or damages thereof. Also, on fulfilling the above condition, the amount will be returned to companies who paid such retro tax ($1.2 billion to Cairn as per report). The bill set forth amending Income-tax Act 1961, such that no tax demand later be made for any indirect transfer of Indian assets if the transaction took place before 28th, May 2012 (The president gave assent to The Finance Bill, 2012 on 28th, May).
What is Retrospective Tax?
Retrospective taxation is a law that allows tax on the product, services, deals from a date before the law got passed. Usually, countries resort to retro taxation where there are irregularities in taxation policies of the country, which have allowed companies to exploit loopholes. While the government says such tax laws clarify existing laws, companies say they should not be penalized for misinterpreting unclear laws. Also, countries like the US, Italy, Belgium, Australia, Netherlands, many more have retrospectively taxed companies.
Need of this Bill
Congress party-led government introduced the law in 2012 under former Finance Minister late Pranab Mukherjee. This law empowered the exchequer to tax deals dating back 50 years and slap capital gains tax wherever ownership had exchanged hands overseas where business assets remain in India. It was called a Draconian law. India was spreading tax terror as globally leading companies that had already acquired assets of Indian companies in earlier years have to pay huge amounts of tax to India.
This bill is currently much required after the government of India has lost in international arbitration against The Vodafone and Cairn Energy cases. This bill might help India to settle billion dollars disputes with these International companies.
Section 9(1)(i) of the Income Tax Act,1961 mentions that the income arises directly or indirectly from or through property or any business connection or transfer of assets located in India deemed to accrue or arise in India. Explanation 5 says, Asset (or capital asset) having any interest or share (acquired directly or indirectly its value considerably from assets situated in India) in a company or entity incorporated or registered outside India, considered to situate in India. The amendment made in this section adopted retrospective taxation, which allows the Indian government to tax such companies (where all the transactions involved the transfer of the shares of the foreign company which acquired its value substantially from assets located in India) for transactions done till 28th, May 2012.
Example to explain retro taxation – A German company holds shares of a company in Australia. The Australian company has a significant number of shares of the Indian company. Now following retro tax rule, if the German company sells shares of The Australian company, the transferred shares of the Australian company (Capital asset) consider to occur in India. The line in provision (and shall always be deemed) allows India to tax retrospectively for transactions done by foreign companies before 28th, May 2012. This amendment created a wrong impression of India for future investors.
Case: Vodafone VS Union of India (also known as Vodafone retro tax case)
Hutchison Whampoa 67% of shares were purchased by Vodafone for $11 billion in May 2007. Indian government demanded a tax of Rs 14,200 crore, including a principal tax of Rs 7,990 crore from Vodafone. Vodafone group took this case to the high court, it ruled in favor of the Income Tax department. Later on, Vodafone challenged the case in the Supreme court in 2012, which ruled in favor of Vodafone and ordered not to demand any tax from Vodafone. In the same year, The Finance Minister, the Late Pranab Mukherjee, overcame this defeat by introducing an amendment in the Finance Act. In that way, it authorizes the Income Tax department to tax retrospectively on such transactions owing to which the burden to pay the taxes again fell on Vodafone. The Indian government has demanded a tax worth Rs.22,100 crore from Vodafone. Vodafone then recourse to Bilateral Investment Treaty (BIT) signed between India-Netherlands in 1995. Clause 9 says both countries would intend to encourage conditions favorable for investors of the other country and ensure that companies situated in other country jurisdiction would accord just and equitable treatment and relish safeguard and security in the territory of the other. The BIT between India-Netherlands expired on September, 22nd 2016.
The Vodafone group had initiated arbitration against India at the Permanent court of arbitration (PCA) at Hague in 2014. Vodafone places reliance on Article 9 of BIT & Article 3 of arbitration rules of UNCITRAL. The tribunal ruled in favor of Vodafone as it contemplates retro tax demand was violating the just and equitable treatment between India-Netherlands. The court also ordered that retrospective tax demand should not be made further to Vodafone.
Case: Cairn Energy (CUHL) VS Government of India
In December 2020, the Permanent court of arbitration (PCA) at Hague had ruled that India’s tax demand of Rs 10,247 Crore from British oil gas exploration company Cairn Energy was invalid as the tax demand on capital gains that the Cairn had made when ownership was transferred from Cairn UK holdings to Cairn India in 2006. The tribunal had directed India to pay damages to Cairn Energy $1.2billion for breaching terms of (BIT) between UK-India. To implement the $1.2 billion arbitration award, Cairn Energy has filed a case in US district court against India. Recently, The French court allowed seizing 20 Indian government properties in Paris valued at over (twenty million euros) in favor of Cairn Energy.
At last, The Taxation Laws (Amendment) Bill, 2021, passed then it will end all legal disputes between the Indian government and companies regarding retro tax. Ultimately that will increase foreign investment and promote faster economic growth in India.
