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Retrospective Tax Amendments Made Prospective, in Retrospect!

The 2012 retrospective amendment has been subject to severe criticism by the business fraternity.

The 2012 retrospective amendment has been subject to severe criticism by the business fraternity.

The Bill proposes to relax this retrospective tax impact for income arising from indirect transfer of Indian assets undertaken before 28 May 2012.

MFinance Minister Nirmala Sitharaman introduced The Taxation Laws (Amendment) Bill, 2021 (“Bill”) in the Lok Sabha on 05 August 2021 that finally puts an end to the government’s pursuit of taxing indirect transfers through retrospective amendments.

The 2012 legislation (commonly referred to as the retrospective tax law), was enacted to nullify the Hon’ble Supreme Court’s ruling in January the same year, that dismissed proceedings initiated by tax authorities against Vodafone International Holdings BV for its failure to deduct withholding tax from the ~USD 11.1 billion consideration paid to Hutchison Telecommunications in 2007 for buying out its 67 per cent stake in a wholly-owned Cayman Island incorporated subsidiary that indirectly held interests in Vodafone India Ltd.

The 2012 retrospective amendment has been subject to severe criticism by the business fraternity and hopes for remedial measures were kept alive when the NDA government that ‘did not believe in retrospective taxes’ came to power in 2014.

The Bill proposes to relax this retrospective tax impact for income arising from indirect transfer of Indian assets undertaken before 28 May 2012. All pending assessments or rectification applications to the extent that they relate to the computation of income from indirect transfer of assets before the said date shall be deemed to be concluded without any additions. Also, in the case of concluded assessments, to the extent that they relate to the computation of income from indirect transfer of assets, shall be deemed to never have been passed or made.

However, in case of concluded assessments, the Bill offers relief only in cases where assessee –

• has filed an appeal before an appellate forum or writ petition before High Court or Supreme Court or has initiated any proceeding for arbitration, conciliation or mediation and withdraws or submits an undertaking to withdraw such appeal or petition;

• has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, and withdraws or submits an undertaking to withdraw such claim; and

• furnishes an undertaking, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the income arising from indirect transfer of asset situated in India, whether under Indian law or under any agreement entered by India with any country.

The Finance Secretary, T V Somanathan had mentioned that a total of INR 8,100 crore was collected using the retrospective tax legislation. Of this, a whopping INR 7,900 crore was from Cairn Energy alone. The Bill, however, proposes to refund the amount paid in these cases without any interest thereon. Given that most litigations have approximately nine years behind them, the interest itself would have been almost equal to the tax amount now being refunded. To this extent, the entities who have been subject to the wrath of the retrospective tax will have to accept the proposed amendment with a pinch of salt.

Some may argue that this corrective amendment comes in too late – given that Vodafone even won international arbitration proceedings, after invoking the arbitration clause under the India-Netherlands BIPA and chances of the government to recover such taxes were only getting bleak by the day. However, justice may have been delayed but not denied. This move sends a strong message of the government’s resolve against retrospective amendments and their determination to improve on the ease of doing business rankings.

Amit Singhania is Partner and Nimish Malpani is an Associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not represent the stand of this publication.

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first published:August 07, 2021, 16:16 IST