[Janvi Parihar and Chinmay Jain are third-year law students at Institute of Law, Nirma University, Ahmedabad]
The tussle going on with respect to the retrospective tax levy on indirect transfer of shares has become a bitter experience for the investors in the Indian market. With the rapidly advancing business environment, tax laws should be dynamic to ensure that a country collects its fair share of proceeds. The issue of taxability of income, levied on indirect transfer of asset or capital asset situated in India due to the transfer of the shares of a foreign company has been a matter of contention from time immemorial.
A lot of other international legislatures and jurisdictions follow the norm of retrospective tax policy. The amendment made to the Indian Income Tax Law in the year 2012 to impose tax on indirect transfer of asset or capital asset to subdue the judgment by the Supreme Court in the case of Vodafone International Holdings vs Union Of India & Anr which invited unprecedented levels of condemnation both domestically and globally. Retrospective tax is created to make adjustments where prior policies and current policies are so dissimilar that tax that was previously paid is now considered to be less. Many other countries, including the United States, Canada, the United Kingdom, the Netherlands, Italy, and Belgium, apply retrospective taxation. Countries utilise this method of taxes to correct any errors made in the past, preventing major corporations from profiting from loopholes. Further, article discusses The new Taxation Amendment of 2021 and analyses its implications in India.
THE NEW TAXATION AMENDMENT OF 2021
The Taxation Laws (Amendment) Act, 2021 (2021 Act), among other things, amended the Income-tax Act, 1961 (Income-tax Act) to provide that no tax demand will be raised in the future for any offshore indirect transfer of Indian assets if the transaction was completed before May 28, 2012, relying on the amendment to section 9 of the Income-tax Act made by Finance Act, 2012.
Considering the need to attract foreign market and foreign investors into India, after the economic set back faced the country post the pandemic, the Government of India introduced the Taxation Laws (Amendment) Bill, 2021, enacted on August 13, removing the retrospective applicability of these amendments. The law states that transactions completed before the 28th of May 2012 (after the adoption of the Finance Act of 2012) are free from any kind of indirect transfer tax. Where tax demands have been paid but litigation is still pending, the government will return the taxes already paid without interest if certain requirements are met, such as the withdrawal of pending appeals. The matters pertaining to tax that were pending before the court will be dismissed. In fact, only indirect transfers made after May 28, 2012, will need to be evaluated from an Indian perspective. The bill was subsequently passed by the Lok Sabha on August 6, 2021 however, the proposals of the Bill carry certain objectives that need to be fulfilled, such as-
No imposing of taxes on indirect transfers of asset or capital asset undertaken prior to 28 May 2012;
No assessment will be made, no tax demand will be enforced, and no notifications will be issued in respect of indirect transactions done before the stated date;
Nullifying of demand orders that have already been raised made/ penalty levied in respect of indirect transfers undertaken prior to the specified date on fulfilment of specified conditions;
Taxes collected pursuant to a demand order issued in relation to indirect transactions made prior to the stated date are refunded. However, such a return would be interest-free.
Several arguments were advanced in support of retrospective taxation. It doesn't ipso facto follow that India's exercise of such a right was justified or appropriate just because it has sovereign right or legislative competence to levy such a retrospective tax. Even though the judiciary lacked the very equity and good conscience while interpreting and applying the tax statutes, they can’t overlook the fact when it comes to tax policy making. The injudicious tactic by the Indian Government exposed them to multiple international arbitration proceedings exclusively on the ground of arbitrary imposition of tax. The ill-advised move exposed India to multiple international arbitration proceedings on the ground that such levy was in violation of several bilateral investment protection treaties' which promise of fair and equitable treatment.
Based on previous arbitration decisions in favour of taxpayers such as Vodafone and Cairns, the Indian government is definitely facing the prospect of having to repay large sums collected along with interest and damages/legal expenses. Some foreign courts have already approved the attachment of India's overseas assets to recover these debts, which is a source of embarrassment. Apart from the financial implication of the problem, the confidence of the investors worldwide has been impacted.
In this context, India's decision to roll back the retrospective effects of the 2012 legislation is a bold remedial step, especially from a political point of view. While committing not to start a new dispute over indirect transfers made before May 28, 2012, the Government of India has also recommended resolving previous disputes by agreeing to repay the funds previously collected, but without interest. The most important precondition imposed for settlement is that the taxpayers must drop any current litigation/arbitration and give up any further claim for damages and expenses as the most crucial requirement for settlement. The taxpayers have also incurred a significant amount of legal costs over this period in following the matter before multiple arbitration and international forums.
Regardless, it is arguably the most forceful expression of determination by the Indian government to honour its international obligations and recover investor trust. It's a step in the right direction for India, and it sends a very positive message to the rest of the world. However, India has to take many more efforts to build a stable, predictable, and investor-friendly tax climate.
Such retrospective tax charges must be abolished so that India does not indulge in the temptation to exercise its legislative power arbitrarily. Along with preventing frequent tax policy changes, it should provide a stable tax environment for businesses to invest, operate, and expand.
In the last several years, there have been numerous tax assessment and administration improvements. Alternative conflict resolution procedures, particularly the capability for obtaining advance decisions, must also be strengthened. The government should also take a realistic approach to tax litigation, putting in place measures to curb the taxman's excessive and unsustainable demands.
One of the benefits of the amendment is that it is not only intended for foreign taxpayers, but also for Indian entities that bought shares in foreign companies and were made liable for Tax Deducted at Source (TDS) retrospectively under the 2012 amendment, and were consequently served with tax demands and penalties for failing to deduct tax. These Indian firms would also profit from the proposed change since tax demands, as well as penalties and other penalties, will be removed if certain requirements are met.
By approving the Tax Act, the Government of India has demonstrated its commitment to staying away from retroactive amendments and taxes.
The Indian government's decision to revoke the amendment on retrospective levy on indirect transfers of asset and capital asset is a great decision. It's probably better late than never in this situation. The government has illustrated its political will to take challenging decisions in the larger economic interest of the nation.
The Bill is an affirmative move by the Government of India and attempts to re-establish the trust of international investors. The actual impact and efficacy of the Bill would depend, however, on whether or not taxpayers opt to withdraw their appeals/arbitration proceedings against the Government of India from foreign courts/tribunals.
Certain aspects of the Bill, such as the lack of interest on any tax refunds, no compensation for assets seized / sold to recover tax dues (e.g., the sale by the Indian tax authorities of Cairn UK Holdings Limited (Cairn UK) shares in Vedanta Limited, as well as the seizure of dividend due to Cairn UK to recover tax dues), and no compensation for litigation costs incurred are all provisions of the Bill. With such psychological impact of the retrospective levy on the foreign investor community, India would have to implement a slew of other policies to balance out. Nonetheless, this must be welcomed as a significant positive way forward by the Government of India in making India an attractive jurisdiction for all the foreign investment and companies and remove one of the more significant pain points foreign investors had.