Questions remain as govt scraps retrospective tax

Good riddance? Questions remain as govt scraps retrospective tax

Representative image. Credit: iStockPhoto

Better late than never. This line would summarise the reaction of many to the recent decision of the government to do away with its proclivity to retrospectively amend the Income Tax Act when it felt that the ambiguities of the law prevented tax being paid in India. In particular, this was a clear reaction to the decision of the Arbitral Tribunal in the case of Cairn India asking the government to return $1.2 billion with interest. The award also empowered Cairn to seize sovereign assets located abroad if the amount was not returned.

The decision of the government to remove the menace of retrospective taxation is to be appreciated. However, it is anybody’s guess whether the government would have done so had Cairn India not got the award from the Arbitral Tribunal.

The Taxation Laws (Amendment ) Bill, 2021 summarises the history of retrospective taxation succinctly by stating that 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. Finally, the 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 government was of the opinion that 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. The clarificatory amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments. It was argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors.   

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 May 28, 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 May 28, 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 thereon.

The conditions

As is normal with anything under the income tax, the decision comes with conditions. The said person should withdraw or submit an undertaking to withdraw any appeal before an appellate forum, any writ petition before any court, any proceeding for arbitration, conciliation or mediation against any order in respect of said income. This would also apply if he has given any notice 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 should also furnish an undertaking, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income 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, whether for protection of investment or otherwise.

The conditions end with a generic statement “such other conditions as may be prescribed”. The line appears to have been inserted more out of habit than with any specific intent. A lot of arguments for and against retrospective taxation have been made since 2012. Inserting new conditions later would only increase the litigation on this matter — the government should get this line removed from the Bill immediately.

The government deserves kudos for taking this step which would send the right signal to large multinationals who have invested in India. While Vodafone initially and Cairn subsequently have hogged all the limelight, there are at least 15 other companies who would benefit from this move of the government. Yet, a million-dollar question remains: Will the government be tempted to do an encore by reintroducing retrospective taxation once the present set of cases is done and dusted?

One can only hope that the answer to this question is in the negative because amendments have also been proposed to the charging section in the Income-tax Act, 1961.

The government should see the recent move of the Organisation for Economic Cooperation and Development (OECD) to introduce a global minimum tax for top multinational companies operating in multiple jurisdictions as an opportunity. It is impossible for the OECD to introduce a formula that suits every tax jurisdiction — concessions have to be granted in individual jurisdictions. Once the basic framework of the global minimum tax is ready, the government should take a relook at their Double Tax Avoidance Agreements with large countries. If necessary, these agreements need to be tweaked to ensure that some part of the income that is not a part of the global minimum tax is taxed in India. Other technicalities under international taxation such as General Anti-Avoidance Rule (GAAR) and Advance Pricing Agreements (APA) should ensure that retrospective taxation in India is history.

(The writer is a Bengaluru-based
tax expert)