Scrapping of Retrospective tax laws by Taxation Laws (Amendment) Bill, 2021

Priyansha Gupta

With the passing of Taxation Laws (Amendment) Bill, 2021 on 5^th August, 2021 in the Lok Sabha which seeks to amend the Income Tax Act, 1961 and Finance Act, 2012, thereby scrapping the “retrospective tax amendments” introduced in 2012, India has made a huge step to permanently bury the controversies (like with Vodafone International Holdings ltd. And Cairn Energy Ltd.) which has adversely affected India’s image as investor friendly destination.

It has very clearly forwarded the message that ‘India is committed to predictability in Taxation.’

The proposed Bill lays down the procedure for tax refunds subject to conditions, adding that it “represents the best way forward” and offers a “fair solution” to companies who have objected to the retro tax law.

Significance of the Amendment bill

After the passing of this bill, no tax demands can be raised for the transactions of Indirect transfer of India’s assets before 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President) under the Retrospective amendments in 2012.

“This is a bold move that addresses the concerns of many foreign investors. It also puts to an end many of the past arbitration cases pending which have created great embarrassment for India in international circles,”
Rohinton Sindhwa, Partner, Deloitte, India

After being unsuccessful in the cases against Vodafone Group and Cairn Energy PLC before an International Arbitration Body, who ruled in favor of taxpayers in September and December, 2020 respectively, government finds it an absolute need to introduce this bill to find an alternative to stop Cairn Energy from moving aggressively to enforce its $1.7 billion awards by confiscating Indian Assets overseas.

Why retrospective taxes were introduced in 2012?

Earlier, Vodafone International Holdings (VIH), a Dutch company procured 100% share in CGP Investments (Holdings) Ltd., a company in Cayman Island, for USD 11.1 billion from Hutchinson Telecommunications International Ltd. in year 2007. CGP through different organizations & actions controlled 67% of Hutchinson Esser Ltd., an Indian company which ultimately came in control of VIH, they in order to avoid paying taxes or capital gains to Indian government found a loophole in Income Tax Act, 1961, where Section 9 clearly states the formal rule of taxing gains should arise from transfer of capital assets that are in India whereas Hutchinson’s gain arose from the sales of shares of CGP, located in Cayman Island and the transaction of Shares were made on foreign lands i.e. Overseas share sale outside the Indian jurisdiction. Even the Supreme Court in 2012 had given a verdict against Indian government saying that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act.

So, in order to nullify the adverse effects of this verdict, then Finance Minister, Pranab Mukherjee retrospectively changed the IT act to tax transactions involving sale or transfer of shares that take place outside India but where the underlying assets are located in India which clarifies that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India. The Finance Act, 2012 also provided for validation of demand, etc., under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets.

The government had used a 2012 law, which gave Tax Authorities the power to reopen past cases, to seek taxes from Vodafone and Cairn over alleged capital gains made several years ago. Under this amendment, tax demand has been raised in seventeen cases including Vodafone and Cairn Energy case.

But this step, instead of achieving benefits through revenue collection, now is anticipating outflow of around 8,900 Crores in addition of returning of taxes collected along with interest.

Objective and Purpose behind introducing this bill

With the passing of Finance Act, 2012 & its retrospective effect, it also invited many criticisms from stakeholders. It is argued that such retrospective amendments disturbs or miligates against the principle of tax certainty and disrupts the image of India in the eyes of foreign investors.

Tax certainty is necessary to lure private equity (PE) firms in India which has witnessed nearly 22% fall in terms of value since 2012. PE investments in India outplayed all sources of capital as only USD 1.3 billion was raised through IPOs (excluding IPOs by public sector undertakings) in 2012, compared with USD 7.6 billion through PE investments.

‘PE firms have invested about USD 7,537 million in India over 415 deals in 2012, compared to USD 9,641 million they invested across 446 deals during the previous year, a fall of 21.8 per cent in terms of value’
Ernst & Young National Tax Leader Sudhir Kapadia

In the Statement of objects and reasons for the bill, Finance Minister Nirmala Sitharaman pointed out that retrospective taxations continue to be a “Sore Point” for Investors.

“In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point for potential investors.”
Finance Minister Nirmala Sitharaman

She also commented on how the ongoing COVID’19 crisis adds to the need of introducing this bill.

“The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.”
Finance Minister Nirmala Sitharaman

The bill proposes to amend the Income Tax Act, 1961 so as to provide that:

No tax demands shall be raised in future over any indirect transfer of Indian assets under the retrospective amendment, if it was undertaken before 28^th May, 2012(i.e., the date on which the Finance Bill, 2012 received the assent of the President).
Demands raised over transfer of assets before 28^th May, 2012, shall be nullified on fulfillment of specified condition which will be added under this amendment in Section 199 of Finance Act, 2012 and Section 9 of Income Tax Act, 1961–
- the said person shall either withdraw or submit the undertaking to withdraw the Appeal before Appellate forum or writ petition before High Court or Supreme Court.
- the said person shall either withdraw or submit the undertaking to withdraw the claim, if filed, in Arbitration, Conciliation or Mediation.
- the said person shall furnish an undertaking through any form or manner as prescribed, by waiving his right to seek or pursue any remedy or claim in relation to said income, whether direct or indirect or under any law, treaty or equity.
It also holds that any amount becomes refundable to the person as a consequence of his fulfilling the specified conditions, then that amount shall be refunded to them, but no interest under Section 244A shall be paid on that amount.

Concluding remarks

This amendment is a commendable and wise step by Indian government as after losing the case from Vodafone company and giving them hefty compensation, it allows and opens the path for many other companies to move to arbitration for the same which ultimately leads to burden of over 50 cases which will disrupt the Indian economy. This step will not only save government from paying additional cost and the cost awarded in Arbitration award but also build confidence in foreign investors by ensuring tax certainty and equitable treatment.

It also supports Indian government slogan of ‘Ease of doing business’ and also sends the message to companies like Vodafone and Cairn Energy that their demand for the scrapping of retrospective effect is heard. This will definitely prove to be a big policy shift for India.

Government of India played very smartly by saving itself from paying interest, damages and legal costs and finding away for companies, including Vodafone and Cairn, to withdraw the litigation in Indian and international courts, with the assurance from the government that its demand for retrospective tax will also be withdrawn by minimum damage to the country’s financial sector.