The Taxation Laws (Amendment) Bill, 2021 to nullify the tax liability
Table of contents
Introduction
Why was this bill introduced?
What does this bill propose?
President’s Recommendation
Key features
- Amendment to the Income-Tax Act, 1961
- Amendment to the Finance Act, 2012
Conclusion
Introduction
The Taxation Laws (Amendment) Bill, 2021 (Bill No. 120 of 2021) was introduced in Lok Sabha by the Minister of Finance, Ms. Nirmala Sitharaman, on August 5, 2021. Lok Sabha passed the bill on 6 August, 2021 and further passed by Rajya Sabha on 9 August, 2021. The Bill aims to amend the Income Tax Act, 1961 (IT Act) and the Finance Act, 2012. The 2012 Act had amended the IT Act to impose tax liability on the income earned from the sale of shares of a foreign company on a retrospective basis (i.e., also applicable to the transactions done before May 28, 2012). The Bill proposes to nullify this retrospective basis for taxation.
Why was this bill introduced?
The issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company was a subject matter of protracted litigation.
The Hon’ble Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act. As the verdict of the Supreme Court was inconsistent with the legislative intent, the provisions of the Income-tax Act, 1961 were amended by the Finance Act, 2012 with retrospective effect, to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India.
The Finance Act, 2012 also provided for validation of demand, etc., under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets. Income-tax demand had been raised in seventeen cases. In two cases assessments are pending due to stay granted by the High Court. Out of the said seventeen cases, arbitration under the Bilateral Investment Protection Treaty with the United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of the taxpayer and against the Income Tax Department.
The amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments. 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. However, this retrospective amendment and consequent demand created in a few cases continues to be a sore point with potential investors. 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.
What does this bill propose?
The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before 28th May, 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, etc., shall be filed. It is also proposed to refund the amount paid in these cases without any interest.
The Bill also proposes to amend the Finance Act, 2012 so as to provide that the validation of demand, etc., under section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc., shall be filed.
President’s Recommendation
Article 274 of Constitution of India states that prior recommendation of the President is required to Bills which are affecting taxation in which imposes or varies any tax which varies any tax or duty in which States are interested, or which varies the meaning of the expression agricultural income. Along with article 117 of Constitution of India provides for Special provisions as to financial Bills, any financial bill shall not be introduced or moved except on the recommendation of the President.
Key features
Amendment to the Income-Tax Act, 1961
This bill proposes to amend section 9 of the Income-tax Act, 1961, by adding proviso. Under the Income-Tax Act, 1961 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 as follows:
- where the said person has filed any appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order, he shall either withdraw or submit an undertaking to withdraw.
- where the said person has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice for it 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, he shall either withdraw or shall submit an undertaking to withdraw the claim.
iii. the said person shall furnish an undertaking waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India. And
iv. any such other conditions as may be prescribed.
Amendment to the Finance Act, 2012
Under section 119 for Validation of demands, etc., under Income-tax Act, 1961 in certain cases of The Finance act, 2012, provisos shall be inserted which 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 any amount becomes refundable under the Income-tax Act, 1961 to the person referred as a consequence of him fulfilling said conditions, such amount shall be refunded to him, but no interest under section 244A of the Income-tax Act, 1961 shall be paid on that amount.
Conclusion
The Taxation Laws (Amendment) Bill 2021 in the Lok Sabha seeks to nullify the effect of the amendment brought by Finance Act 2012 to impose tax liability on gains arising from indirect transfer of Indian assets with retrospective effect. The bill, if passed, is likely to benefit many companies including Vodafone and Cairn Energy who had to pay tax based on the retrospective law. Sitharaman said, “This amendment is required especially at a time when we want to show that India is a responsible democracy. We take our laws seriously, particularly tax-related laws, and we take them with consistency. Without consistency businesses will be unable to move forward,” her view was signalling that ending the retrospective tax regime will allow investors to enter India in a fearless manner.
