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

Introduction

The Taxation Laws (Amendment) Bill, 2021 ("The Bill") was passed in the Lok Sabha on 5th August 2021. It seeks to amend the Income Tax Act, 1961 and Finance Act, 2012, thereby scrapping the "retrospective tax amendments" which were introduced in 2012. With this, India has made a considerable step to permanently burying the controversies, especially with Vodafone International Holdings Ltd. and Cairn Energy Ltd. These controversies adversely affected India's image as an investor-friendly destination.

The Bill has very clearly forwarded the message that 'India is committed to predictability in Taxation.' It 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 amendments.

Significance of the Amendment Bill

After the passing of this Bill, no tax demands can be raised for the transactions of Indirect transfer of Indian 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.

The Government was unsuccessful in the cases against Vodafone Group and Cairn Energy PLC before an International Arbitration Body which held that the retrospective legislation was in breach of the guarantee of fair and equitable treatment guaranteed under the Bilateral Investment Treaty, in September and December 2020. Therefore, the Government urgently needs 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 were Retrospective Taxes Introduced in 2012?

In 2007, 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. CGP through different organizations & actions controlled 67% of Hutchinson Esser Ltd. This Indian company ultimately came in control of VIH, they, to avoid paying taxes or capital gains to the Indian Government, found a loophole in the Income Tax Act, 1961("IT Act"). Section 9 of the IT Act clearly states the formal rule of taxing gains should arise from the transfer of capital assets that are in India, whereas Hutchinson's gain arose from the sales of shares of CGP, located in Cayman Islands and the transaction of shares were made on foreign lands, i.e. overseas share sale outside the Indian jurisdiction. The Supreme Court in 2012 had given a verdict against the Indian Government, highlighting that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the IT Act.

So, to nullify the adverse effects of this verdict, the then Finance Minister Pranab Mukherjee retrospectively amended the IT Act (Section 2(14), Section 2(47) and Section 9 of IT Act, 1961) to tax transactions involving the sale or transfer of shares and cross-border transactions but where the underlying assets are located in India. This clarified that those gains arising from the sale of a foreign company's share are taxable in India if it derives its value substantially from the assets located in India. The Government used a 2012 law, which gave tax authorities the power to re-open past cases, to seek taxes from Vodafone and Cairn over alleged capital gains made several years ago. It was seen that the passing of the Finance Act, 2012 & its retrospective effect disturbs and mitigates 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. 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.

Around 21.8% of a fall can be seen in terms of value from 2011 to 2012 (i.e. after the retrospective amendment). As in 2011, India received an investment of around USD 9,641 million over 446 deals by the PE firms which reduced to investment of USD 7,537 million over 415 deals in 2012. The action was required to tackle these challenges. Thus, the author believes the Bill was passed.

Objective and Purpose Behind Introducing this Bill

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. She further noted:

"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."

She also commented on how the ongoing Covid-19 crisis adds to the need of introducing this Bill.

The Bill proposes to amend the IT Act to provide for the following three:

1. No tax demands shall be raised in future over any indirect transfer of Indian assets under the retrospective amendment if it was undertaken before 28th May 2012 i.e., the date on which the Finance Bill, 2012 received the assent of the President (Chapter II of the Bill – Amendment of Section 9 in IT Act, 1961).

2. Chapter III of the Bill: Demands raised over the transfer of assets before 28th May 2012 shall be nullified on fulfilment 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 concerning said income, whether direct or indirect or under any law, treaty or equity.

3. 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 (Chapter III of the Bill).

Conclusion

This amendment by the Indian Government is a step in the right direction. After losing the case from Vodafone Company and giving them hefty compensation, it allowed many other companies to move to arbitration for the same, which ultimately led to the burden of over 50 cases that disrupted the Indian economy. This step will save the Government from paying the additional cost and the cost awarded in the Arbitration award and build confidence in foreign investors by ensuring tax certainty and equitable treatment.

It also supports the Indian Government slogan of 'ease of doing business' and sends the message to companies like Vodafone and Cairn Energy that India believes in policies which aims at protecting investor’s interest. Therefore, this Bill will prove to be a significant policy shift for India. The Government of India played smartly by saving itself from paying interest, damages and legal costs and finding a way for companies, including Vodafone and Cairn, from withdrawing 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.