Why in News?
- On August 5, 2021, the Finance Minister introduced the Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha to nullify the tax clause provision that allows the government to levy taxes retrospectively.
- The Bill amends the Income Tax Act 1961 (IT Act) and the Finance Act, 2012.
- The government has been fighting legal cases against Vodafone and Cairn Energy on taxes it has claimed retrospectively on transactions these entities entered into relating to operations in the country.
What is Retraspective Taxation?
- Retrospective tax is nothing but a combination of two words' retrospective' and 'tax' where retrospective means taking effect from a date in the past and tax refers to a new or additional levy of tax can a specified transaction.
- On August 13, 2021, the Taxation laws (amendment) Act, 2021 received the assent of the President.
- Hence, retrospective tax means creating an additional charge or levy of tax by way of an amendment from specified date in the past.
- In the Union Budget 2012, the then Finance Minister introduced an amendment to the Finance Act, which allowed the government to retrospectively tax such transactions.
- The 2012 amendment to Income Tax Act 1961 aimed to tackle complex transactions that manage to escape taxation in India involving a capital gains tax liability here.
Why did the government decide to rescind the provision?
- The government had raised tax demands in 17 such cases, Vodafone and Cairn attracted the most attention.
- Both initiated international arbitration under bilateral agreements.
- Vodafone got a favourable ruling in September 2020 at the Permanent Court of Arbitration at The Hague in the ₹22,000-crore case.
- In December, 2020 an Arbitral Tribunal ruled in favour of Cairn, awarding it $1.2 billion plus interest and costs in damages, which came to $1.7 billion in total.
- India has appealed against both rulings.
- In the year 2021, Cairn had applied in courts in the U.S., Canada, Singapore, Mauritius and the Netherlands for seizure of Indian assets such as the state-owned national carrier Air India's aircraft.
- It also obtained a legal order in France freezing some real estate assets owned by India in Paris, valued at about $24 million.
- Though the cases are in appeal, the loss of the arbitration cases and Cairn’s pursuit of India’s assets abroad may have forced the government’s hand.
- Such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination.
- The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play.
Features of the Taxation Laws (Amendment) Bill, 2021-
- Tax on income earned from the sale of shares outside India: Under the IT Act, non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India.
- The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.
- As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale.
- The Bill proposes to nullify this tax liability imposed on such persons provided they fulfil certain conditions. These conditions are-
(i) if the person has filed an appeal or petition in this regard, it must be withdrawn or the person must submit an undertaking to withdraw it.
(ii) if the person has initiated or given notice for any arbitration, conciliation, or mediation proceedings in this regard, the notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them.
(iii) the person must submit an undertaking to 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.
(iv) other conditions, as may be prescribed.
- The Bill provides that if a concerned person fulfils the above conditions, all assessment or reassessment orders issued in relation to such tax liability will be deemed to have never been issued.
- Further, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.
The move is simultaneously correct, pragmatic and courageous. A retrospective tax went against the grain of our international commitments. As the post-pandemic recovery picks up and we embark on a project of rebuilding, our focus needs to be on the future, rather than keeping a sword of uncertainty dangling over potential investors for past deals. Such decisions require political capital, and the government has done well to use its reserves.