The Taxation Laws (Amendment) Act, 2021

Overview of the Amendment

On August 13, 2021, the Taxation Laws (Amendment) Act, 2021 received presidential assent to amend the Income Tax Act, 1961 and the Finance Act of 2012. The 2021 Act nullifies the “retrospective taxation” that was introduced with the Finance Act of 2012.

Origin of Retrospective Taxation

The origin of retrospective taxation can be traced backed to 2012, When Vodafone Ltd. was retrospectively taxed by the Indian tax authorities for a 2007 deal.

The Supreme Court in 2012 ruled in favour of the telecom company, reiterating the need for certainty in taxation [Vodafone International Holdings B.V. v. Union of India & Anr. (Civil Appeal 733 of 2012)]. This decision dissatisfied the Government and to override it, the Government passed the Finance Bill, 2012 to amend the 1961 Act retrospectively, returning the onus of payment on Vodafone.

Criticism and Conflicts

Since the enactment of the Finance Act, 2012, the Government received a lot of criticism globally. Several companies like Vodafone, Cairn Energy and Earlyguard initiated investment arbitration proceedings against the Government. The former two companies even won the proceedings against India, with exorbitant arbitral awards of INR 75 crore and INR 8,842 crore respectively.

Fixing The Errors With Condition   

The Taxation Laws (Amendment) Act, 2021 appears to be a step of the Government to fix the error it made in 2012.

It amends Section 9(1)(I) of the Income Tax Act, 1961 by inserting provisos after the 5^th explanation, that in respect of income arising out of the transfer of an asset situated in India, before 28^th May 2012, the retrospective taxes levied on any person who fulfils the “prescribed conditions”, shall not apply.

Further, in Section 119 of the Finance Act, 2012, the proviso is inserted that in case any amount becomes refundable  to such person, the same should be refunded without any interest on the amount.

The conditions, include:-

1. Withdrawal of any appeal or petition filed before the courts in this regard or person submit an undertaking to withdraw it

2. The notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them

3. The person should 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

4. Other condition as may be prescribed.

Impact of the Act

The Act ensures that there cannot exist any future demand by the government for the collection of taxes on the basis of an amendment with retrospective effect. This Act makes the tax regime of India more predictable, increasing the scope of foreign investment into the country as it clarifies the stance of Indian Government on imposition of retrospective taxation, will instill foreign as well as domestic investors with confidence in the Indian Economy, will spur companies which are at the cusp of deciding their investments into investing in India, will avoid unnecessary litigation and save time and costs of the government, will provide impetus to country’s goal of becoming a $5 trillion economy. Overall this Act would have a positive effect on the Indian economy. 

Effect of International Relations

India has been a part of several trade and investor protection treaties and the discussed amendments of 2012 have been in contravention of these treaties. Consequentially, these treaties were invoked by parties before arbitration tribunals. Further, it would have severely affected the trust of potential foreign investors to make investments in the country and affect the country’s rank in the Ease of Doing Business Index. Hence, it was important to nullify this retrospective effect of laws.

Road Ahead

Though, the 2021 Act has reversed the retrospective taxation, it is to see how the investor would react to this step, given “the prescribed conditions”.

Specially companies like Vodafone and Cairn that have suffered breach of treaties and huge litigation damages due to the Government, may not be satisfied with getting back the principal amount without any interest, on an added condition of waiving all the available remedies and an option with the Government to prescribe any other condition, in future. 

Conclusion

The introduction of the Taxation Laws (Amendment) Act, 2021 has been a right step by the Parliament in regards to invalidating the retrospective effect of the 2012 Finance Act. Retrospective application of taxation is clearly against the principle of certainty and, therefore, should not be prevalent in the Indian taxation system.

Further, nullifying this retrospective application would surely yield benefits for the economy as it will help to regain the trust of foreign investors. Today, the country 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 essential role in promoting faster economic growth and employment.

Article Complied By-

Mayank Garg

CS Professional(Result Awaited)

H/p:- +91 9582627751

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