Scrapping of Retrospective Tax Laws by Taxation Laws (Amendment) Bill, 2021
[Unnati Sinha is a third year student at Narsee Monjee Institute of Management Studies]
The Lok Sabha approved the Taxation Laws (Amendment) Bill, 2021 ("The Bill") on August 5 2021. It aims to repeal the "retrospective tax modifications" that were implemented in 2012 by amending the Income Tax Act 1961 and Finance Act 2012. Through this, India has taken a big stride toward putting the disputes behind it, particularly those involving Vodafone International Holdings Ltd. and Cairn Energy Ltd. These disputes hurt India's reputation as a welcoming country for investors.
The Bill made it explicit that "India is dedicated to predictability in taxation" . The mechanism for conditional tax refunds is outlined in the document, which also claims that it "represents the best way forward" and provides a "fair solution" for businesses that have opposed to the revisions.
Significance of the Amendment Bill
In accordance with the retroactive modifications in 2012, no tax claims can be made for indirect transfers of Indian assets that occurred prior to May 28 2012 (the date on which the Finance Bill 2012 obtained the President's assent).
In September and December 2020, an international arbitration body ruled that the retroactive law violated the promise of fair and equal treatment made in the bilateral investment treaty, and the government lost its suits against Vodafone Group and Cairn Energy PLC. In order to prevent Cairn Energy from taking truculent action to enforce its $1.7 billion awards by seizing Indian Assets abroad, the Government expeditiously needs to pass this Bill.
Why did Retrospective Taxes come into existence in 2012?
In 2007, a Cayman Island firm, CGP Investments (Holdings) Ltd., was acquired by Dutch corporation Vodafone International Holdings ("VIH") for USD 11.1 billion from Hutchinson Telecommunications International Ltd. Through various entities and acts, CGP had a 67% stake in Hutchinson Esser Ltd. In order to steer clear of paying taxes or carried interest to the Indian government, this Indian corporation finally gained the ownership of VIH. To do so, they discovered a backdoor in the Income Tax Act 1961. ("IT Act"). The general statute of taxing profits should emerge from the transfer of capital assets that are in India, according to Section 9 of the IT Act, but Hutchinson's profit came from the selling of shares of CGP, which are situated in the Cayman Islands, and the transaction of shares was done on foreign lands, i.e. beyond the Indian jurisdiction. The Supreme Court ruled against the Indian Government in 2012, emphasizing that earnings from the indirect transfer of Indian assets are not subject to taxation under the provisions of the IT Act that are now in effect.
Therefore, the then-Finance Minister Pranab Mukherjee retroactively revised the IT Act (Sections 2(14), Section 2(47), and Section 9 of IT Act, 1961) to tax transactions regarding the purchase or transfer of shares as well as cross-border transactions where the underlying assets are situated in India to offset the damaging consequences of this decision. This made it clear that profits from the sale of a foreign company's stock are taxed in India if that stock receives a significant portion of its worth from Indian assets. The Government sought taxes from Vodafone and Cairn for claimed capital gains earned some years ago under a 2012 rule that allowed tax officials the authority to revive old cases. It was observed that the Finance Act of 2012's passage and its retroactive effects undermine the idea of tax predictability and damage India's reputation among overseas investors.
To entice Private Equity ("PE") businesses to India, tax certainty is required. PE investments outperformed all other forms of funding in India, as just USD 1.3 billion (excluding IPOs by PSUs) was raised via IPOs in 2012 compared to USD 7.6 billion through PE investments.
In terms of value, there was a decline of around 21.8% from 2011 and 2012. (i.e. after the retrospective amendment). Similar to 2011, India got investments from PE firms totaling roughly USD 9,641 million over 446 agreements, a figure that fell to USD 7,537 million over 415 deals in 2012.
Intent and Purpose behind introducing the bill
Nirmala Sitharaman, the ex-finance minister, said that retroactive taxation continues to be a "Sore Point" for investors in the Statement of Objects and Reasons for the Bill. She also added: "The banking and industrial sectors have undergone significant changes over the last several years, which has improved the business climate in the nation. Prospective buyers tend to have issues with this retroactive clarificatory modification and the desire it in certain instances produced."
She said that the continuing Covid-19 situation makes it important to introduce this Bill.
The following three provisions were proposed as part of the bill's amendment to the IT Act:
(i) No tax claims related to any intermediate transfer of Indian assets would be made going forward under the retroactive amendment if the transaction was made before May 28 2012, the day the Finance Bill 2012, obtained the President's assent (Chapter II of the Bill – Amendment of Section 9 in IT Act, 1961).
(ii) In Chapter III of the Bill, the following conditions will be introduced to Sections 199 of the Finance Act 2012 and Section 9 of the Income Tax Act of 1961:
The aforementioned individual must either withdraw or submit an undertaking to withdraw an appeal before an appellate body or a writ petition before the High Court or Supreme Court.
In the event that we brought a claim in arbitration, conciliation, or mediation, the aforementioned individual must either withdraw it or provide an assurance to do so.
By renouncing his right to seek or prosecute any remedy or claim against such income, whether direct or indirect, or under any law, treaty, or equitable principle, the aforementioned individual must provide an assurance in any type or manner required.
(iii) It also states that any sum that becomes recoverable for the person as a result of meeting the required criteria will be returned to them, but no interest under Section 244A will be charged on that sum (Chapter III of the Bill).
The Road Ahead
Even though the retroactive taxation was overturned by the 2021 Act, it would be intriguing to see how the investor will respond to this change given "the prescribed criteria". Businesses like Vodafone and Cairn, in particular, which have experienced agreement breaches and significant monetary losses as a result of the Government's actions, may not be contented with receiving their principal amounts back without incurring interest as long as they also waive all potential legal recourse and give the Government the option to impose additional terms in the future.
This change made by the Indian government is a positive development. After failing the Vodafone Company case and awarding them a sizable settlement, it let many other businesses to pursue similar claims in arbitration, which eventually resulted in the load of more than 50 lawsuits that negatively impacted the Indian economy. By providing tax stability and due process, this action will spare the government paying the extra costs and the costs specified in the Arbitration ruling and increase foreign investors' trust.
Additionally, it endorses the government's campaign tagline of "ease of doing business" and communicates to businesses like Vodafone and Cairn Energy that India favors laws that safeguard the interests of investors. As a result, this Bill will prove to be a substantial change in India's policies. With the certainty that its requirement for retroactive tax will also be rescinded with the least possible harm to the country's financial system, the Government of India acted smart by protecting itself from having to pay interest, damages, and legal expenses. The Government also managed to prevent businesses like Vodafone and Cairn from drawing down their lawsuits from Indian and international courts.