Rajya Sabha Returns Invoice Amending Tax Regulation to Revoke Retroactive Tax Claims

The Rajya Sabha returned to Lok Sabha on Monday the Taxation Laws (Amendment) Bill 2021 in the Lok Sabha, which aims to retrospectively reverse the effects of the Finance Act 2012 amendment to impose tax liability on profits from indirect transfers of Indian assets cancel effect.

Since the Taxation Laws (Amendment) Bill 2021 was certified as a monetary bill by the Lok Sabha Speaker, the Rajya Sabha has limited powers over it. According to Article 109 of the Constitution, the Rajya Sabha can only return a monetary bill to the Lok Sabha with or without its recommendations. It is then up to the Lok Sabha to pass the law, whether or not it accepts the recommendations of the Rajya Sabha.

Yesterday, the Rajya Sabha passed a motion from Union Finance Minister Nirmala Sitharaman to return the Tax Laws Amendment 2021, which aims to end all tax claims on companies like Cairn Energy and Vodafone by changing the 2012 Finance Law provision on indirect Transfer of Indian Assets Before May 28, 2012. The House of Lords made no recommendations on the bill.

“We keep India’s sovereign right to taxes absolutely intact, but when applied retrospectively, it created a total disruption in the system of things for businesses and created uncertainty,” said the Finance Minister in Rajya Sabha during the discussion. She said the bill will end the “spirit” of the retroactive taxation clause that we have had for so long since 2012. The opposition staged a working rain during the debate. Last week the Lok Sabha passed the law.

The 2012 amendment was passed to overturn the Supreme Court ruling in the Vodafone case that gains from the indirect transfer of Indian assets would not be taxable under the then provisions of the Income Tax Act 1961.

Thereafter, the provisions of the Income Tax Act of 1961 were retrospectively amended by the Finance Act of 2012 to clarify that gains from the sale of shares in a foreign company are taxable in India if those shares, directly or indirectly, derive its value essentially from those located in India Assets. The 2012 Finance Act also provided for the validation of demand, etc.

This change met with widespread criticism, especially internationally, as the retrospective effect contradicts the principle of tax security. In the explanatory memorandum for the draft law, the ministry stated that the retrospective clarification amendment “is still a sore point for potential investors”.

The Tax Laws (Amendment) Bill proposes to amend the Income Tax Act to stipulate that the effects of the 2012 amendment will be prospective.

The bill provides for an amendment to the IT Act to provide that “any indirect transfer of Indian assets in transactions prior to May 28, 2012 based on this retrospective amendment will not be subject to future tax claims”. On May 28, 2012, the Finance Act 2012 received President approval.

The bill also provides that the requirement made before May 28, 2012 for an indirect transfer of Indian assets is waived if certain conditions are met, such as redemption or an obligation to redeem pending litigation and an obligation to do so, that no claim for costs, Compensation for damages, interest, etc. is claimed. It is also suggested that the amount paid be refunded interest-free in these cases. The draft law also provides for the 2012 Finance Act to be amended so that the confirmation of application, etc. in accordance with Section 119 of the 2012 Finance Act, if certain conditions are met, such as the withdrawal of a pending legal dispute and an assurance that no claim for costs, damages, interest, etc. is applicable should be made.

“The country is now at a point where rapid economic recovery from the COVID-19 pandemic is the order of the day and foreign investment plays an important role in promoting faster economic growth and employment,” the government said .

If passed, the law should benefit many companies, including Vodafone and Cairn Energy, which had to pay taxes under the retroactive law.