The Taxation Amendment Bill 2021

 

BACKGROUND: RETROSPECTIVE TAX ON INDIRECT TRANSFERS IN 2012

•                                  SC in 2012 in the case of Vodafone International Holdings B.V.: [2012] 17 taxmann.com 202 (SC) held

•                                  Income from transfer of foreign assets deriving their value substantially from assets located in India (‘Indirect Transfer’) is not taxable in India

•                                  The taxpayer, a non-resident company, was not required to withhold tax on purchase of shares of foreign company which resulted in Indirect Transfer

•                                  Retrospective Amendments made to section 9 of Income-tax Act, 1961 (’IT Act’) vide Finance Act, 2012 with effect from 1st April 1962

•                                  Shares of company incorporated outside India deriving their value substantially from assets located in India will be deemed to be a capital asset situated in India and capital gains from their transfer will be taxable in India

•                                  Section 119 of Finance Act, 2012 provided that notwithstanding the judgment of any judicial forum, the notice of demand in relation to income from Indirect Transfer shall be deemed to be valid

 

AMENDMENT PROPOSED NOW TO NULLIFY RETROSPECTIVE EFFECT

•                                 Government introduced The Taxation Laws (Amendment) Bill, 2021 in Lok Sabha to amend section 9 of the IT Act and section 119 of the Finance Act, 2012

•                                  Proposal to not apply the levy on indirect transfers introduced in

2012 to transactions that took place before 28th May 2012 (i.e. the date when Finance Act, 2012 came into effect)

•                                  Indirect transfers before 28th May 2012 categorized into the following:

•                                  Conditions to be fulfilled by the taxpayer in cases falling in Category 2 to nullify effect of orders already passed:

•                                  Taxpayer shall withdraw or submit an undertaking to withdraw:

•                                 Any appeal or writ petition against the order filed by the taxpayer

•                                 Any proceeding for arbitration, conciliation or mediation, initiated by the taxpayer under any international agreement entered by India for protection of investment or otherwise

•                                  Taxpayer shall furnish an undertaking waiving its right to seek or pursue any remedy or any claim available to it under any law, in equity, under any statute or under any international agreement entered by India

•                                  Such other conditions as may be prescribed

•                                  Rules to be framed prescribing the procedure to be followed by the taxpayer for fulfilling above conditions

 

 

 

 

COMMENTS

 

The retrospective amendments in 2012 had invited a lot of criticism internationally and were counterproductive to idea of India being an attractive destination for making investments.

 

Many non-resident taxpayers had initiated arbitration proceedings under the bilateral investment protection treaties entered by India. In certain cases, the arbitral awards were passed in favour of taxpayers.

 

The proposed rollback of retrospective levy has the potential of putting an end to the long lasting battle in relation to taxation from indirect transfer and will also boost India’s image while it is recovering from pandemic.

 

The amendments propose a middle path to end the dispute. Where demands have already been raised in the past, the taxpayers will be entitled to refund of amounts already paid, provided they forego interest on such refunds as also any claim of damages and costs. It will be interesting to see whether taxpayers indeed come forward to settle disputes on these terms.

 

If the demands are yet to be raised, the taxpayers may be able to get refund of any amount already paid (paid under protest or withheld by the payer) along with applicable interest on such refunds.