WHAT IS RETROSPECTIVE TAX?

Retrospective Tax is a type of tax which is imposed on transactions which has taken place in the past. The Retrospective Tax was introduced in the year 2012 by the late former Prime Minister and the then Finance Minister Pranab Mukherjee. The Retrospective Tax brought in effect of imposing and obtaining Tax from transaction taken place in the past, however, those were not taxable at the time when such transactions actually took place.

TAXATION LAW (AMENDMENT) BILL 2021: NULLITY OF RETROSPECTIVE TAX

The Taxation Law (Amendment) Bill 2021 which has been introduced by the Union Finance Minister of India, Smt. Nirmala Sitharaman, aims to end all retrospective taxes on indirect transfer of Indian assets prior to May 28, 2012.

The Taxation Bill 2021 seeks to amend the provisions of the Income Tax Act, 1961 which was earlier amended by the Finance Act 2012 with retrospective effect. The 2012 Act amended on the imposition of the tax on the income earned from sale of shares of foreign company on retrospective basis. The 2021 bill nullifies the effect of retrospection.

Section 9(1) of the Income Tax Act 1961 deals with transfer of assets and income incurred or arising, whether directly or indirectly:

(a) through any business connection or property in India,

(b) from any assets or source of income situated in India,

(c) or through a transfer of a capital asset situated in India is deemed to arise or accrue in India.

Retrospective effect shall be nullified after fulfillment of certain conditions are specified:

• An Appeal / Petition filed shall be withdrawn or be undertaken to withdraw in the foreseeable time prior being involved in the retrospective scheme.
• Any Arbitration, Conciliation, or Mediation proceedings in this matter shall be withdrawn or undertaken to withdraw.
• A concerned person shall waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement, and
• Any other conditions, as may be prescribed.

WHY RETROSPECTIVE TAXES WAS INTRODUCED IN 2012?

• Government need to implement this amendment so as:

1. To Prevent The Revenue Loss

In the case of Vodafone International Holdings vs Union of India, Vodafone International Holding (Vodafone) and Hutchison Telecommunication International Limited (HTIL) entered into a agreement by which HTIL transferred the share capital of its Cayman Islands based subsidiary company to Vodafone.

Through this transaction, Vodafone indirectly acquired a 67% majority stake in the Indian joint venture Hutchison Essar Limited (HEL). The transaction was deliberately carried out in Cayman Islands and not in India, simply to avoid capital gain tax which amounted to around Rs14,000 Crores. According to State of tax justice report of 2020, India losses over 10 billion dollars every year in tax revenue.

The Supreme Court ruled that Vodafone is not liable for the tax deduction, because the income generated by the indirect transfer of Indian assets was not chargeable in India.

2. To undo the Supreme Court decision in Favor of Vodafone company.
3. To subdue the lack of international agreements on tax avoidance.

WHY RETROSPECTIVE TAXATION SCRAPPED IN 2021?

The government is withdrawing this retrospective amendment due to following factors:

1. Increase in litigation

The number of cases filed against the government have gone up last 8 years. Company like Vodafone and Cairn dragged the Indian government before the International Arbitration Tribunal (IAT) under bilateral treaties. The order issued by the International arbitration tribunal were gone against the Indian government and it also affected global image on India.

2. Retrospective amendment may affect foreign investment

There is no denying that the retrospective amendment is well within the powers of the parliament, but some amendments lead to greater uncertainty in taxation and discharge foreign investment.

3. Under this retrospective amendment, no increase in revenue collection.
4. Uncertainty in Economic Policy

Due to retrospective taxation effect. Economic survey of year 2018-2019 highlights the direct co-relation between higher economic policy uncertainty and lower GDP growth rate in India.

    WHAT ARE THE DEMERITS OF THE TAXATION AMENDMENT BILL 2021?

• Under the Taxation Amendment Bill 2021, the government shall pay Rs. 8000 crore to companies including Vodafone, Cairn energy, WNS Capital in lieu of the taxes paid by them.
• Income tax department shall provide refunds for the payments, in case of other undetected matters related to the matter.
• These refunds will be a huge loss to the Indian government.

WHAT ARE THE BENEFITS OF THE TAXATION AMENDMENT BILL 2021?

• It will impart foreign as well as domestic investors with confidence to invest in the Indian economy.
• It will avoid unnecessary litigation and save time and costs of the government.
• It will boost the policy of the government to have a predictable tax regime.

According to the Union Finance Minister, the Taxation Amendment Bill 2021, will end retrospective taxes imposed on indirect transfer of Indian assets and will help encouraging the investors and provides boost to India in becoming  USD 5 trillion economy.

CONCLUSION

The amendments to the 2012 Financial Law aroused criticism from stakeholders, mainly regarding the retrospective effect of the amendments. Some believe that the retrospective tax will damage India’s reputation as an attractive investment destination. The Tax (Amendment) Bill 2021 was introduced in Parliament to propose repeal of the retrospective Tax. Furthermore, during the COVID-19 pandemic, economic recovery is urgent and foreign investment plays a vital role in promoting faster economic growth and employment. With the help of this amendment Indian government is trying to revive the foreign investments in the Indian market and economy to become a trillion-dollar economy.

Our Corporate Professional Team is ever willing to provide assistance on any issue concerning GST, Insolvency and Bankruptcy Law, Business Model Advisory in India and Abroad, Customs Law, Corporate & Commercial Advisory, IPRs. Secretarial Compliances, Agreement Drafting & Negotiations etc. you may write us on connect@legallands.com, contact@legale-services.com