What Is The Retrospective Tax Amendment, And How Will It Help Some Of The Biggest Corporates

A bill that seeks to do away with the contentious retrospective tax provision has been introduced by Finance Minister Nirmala Sitharaman in Lok Sabha.

The Taxation Laws (Amendment) Bill, 2021 was introduced by the Finance Minister in Lok Sabha on Thursday.

AFP

Taxation Laws (Amendment) Bill

The Taxation Laws (Amendment) Bill proposes to amend the Income Tax Act, 1961 to provide that no tax demand shall be raised in future on the basis of the retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.

The amendment to the tax law could resolve at least 17 disputes of tax payments amounting to 500 billion rupees or more.

The Finance Bill, 2012 had received the assent of the President on this day.

The new bill proposes that the demand raised for indirect transfer of Indian assets made before May 28, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest shall be filed.

Cairn Energy

British oil and gas company Cairn Energy is seeking to recover $ 1.2 billion from India after winning an arbitration against retro tax. An appeal against the order was filed in the Hague Court of Appeal on March 22, 2021 by the Indian Government.

The Finance Act, 2012 provided for validation of demand under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets.

Last month, it was reported that Cairn had received a French court nod to takeover Indian assets in Paris to recover part of the arbitration award.

cairn energy

In its pursuance, income tax demand had been raised in seventeen cases.

Objects and reasons of the new bill

In two cases, assessments are pending due to stay granted by High Court. Arbitration under Bilateral Investment Protection Treaty with United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of taxpayer and against the Income Tax Department.

The statement of objects and reasons of the new bill states that clarificatory amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments.

Unsplash

"It is argued that such retrospective amendments militate against the principle of tax certainty and damage India's reputation as an attractive destination. 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," it says.

"However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors," it adds

The statement says that 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 in promoting faster economic growth and employment.

A welcome step

Ved Jain, former president, ICAI, said this will settle the issue of arbitration as under Indian Income Tax Act itself no tax could be levied on such capital gains up to May 28, 2012 once this amendment comes into force.

"The full amount of tax will have to be refunded but without interest as a specific provision has been inserted of no interest on such refund under section 244A. Demand created before May 28, 2012 will be nullified in 17 cases including two cases where there is a stay. Undertaking to be furnished by these entities that no claim, damages, interest etc shall be filed," he said.

Neeru Ahuja, Partner, Deloitte India, said the bill is a welcome step.

"The amendment is setting right wrong which was done many years ago. It will go away now. Lots of disputes repeated to indirect transfers will be settled now and litigations will go away with the introduction of this bill. It is win-win for both companies and the government as well. This is a big step towards bringing more certainty. This will boost investor confidence," Ahuja said.

Correcting a mistake

US-India Strategic and Partnership Forum (USISPF) on Thursday applauded the Indian move to withdraw the retrospective law relating to tax on indirect transfers.

¡°Yesterday's Bill introduced by the Finance Ministry will only encourage more international investments into India and is a welcome relief for companies who have long invested in the country. The USISPF is proud to have worked on this issue for many years,¡± Mukesh Aghi, president and CEO of the USISPF said.

¡°USISPF applauds India's move to withdraw the retrospective tax amendment relating to tax on indirect transfers,¡± he said in a statement.

¡°The 2012 decision of the UPA government to impose retrospective tax has been a black mark on India's reputation as a predictable investment destination,¡± he said.