The End of the Retrospective Tax

admin November 4, 2021
Updated 2021/11/05 at 6:15 AM

The Taxation Laws (Amendment) Bill, 2021, passed by the Lok Sabha, proposes that tax claims against companies on deals made before May 28, 2012, that involve the indirect transfer of Indian assets be dropped if certain conditions are met, such as the withdrawal of pending litigation and assurance that no claim for damages will be filed.

The subject of retrospective taxation has a long history

Vodafone (a British business) paid $11 billion in Caymans Island in 2006-2007 to buy Hutchison Essar (an Indian telecom firm). As a result, the transaction did not take place in India, and the businesses did not make any capital gains tax preparations because the transaction occurred overseas or outside of Indian jurisdiction. In September, India’s Income Tax Department issued a warning to Vodafone for failing to deduct tax at source from the sum it paid to Hutchison in lieu of the capital gains tax it claimed the seller Hutchison owed. In January 2012, India’s Supreme Court supported Vodafone, finding that an indirect transfer of shares to a non-Indian firm would not be taxed in India. The supreme court further stated that under existing law, the Indian government is not permitted to charge capital gain tax on overseas transactions even though the underlying asset is situated in India. The then-Finance Minister introduced a retrospective amendment to the capital gain tax in the Union Budget of 2012, which states that any capital gain arising out of a transaction, even if it is international in nature, but the asset is located in India, will be subject to capital gain tax from 1962 onwards.

What is the Taxation Laws (Amendment) bill 2021

The Taxation Laws (Amendment) Bill, 2021, proposes to modify the Income-Tax Act of 1961 and the Finance Act of 2012, as well as to repeal the controversial retrospective tax demand clause. It was enacted after India’s retroactive tax demand lawsuits against Cairn Energy Plc. and Vodafone were dismissed. According to the law, the demand was raised in 17 cases, and the retro tax was condemned for violating the concept of tax certainty and tarnishing India’s image as a desirable location. It was a thorn in the side of ¬†potential investors. The bill further stipulates that any demand for a “indirect transfer of Indian assets” filed before May 28, 2012, will be cancelled if certain requirements are met, including: Companies that have already been served with notifications would be required to drop all legal proceedings initiated against the Indian government. Both Vodafone and CAIRN should drop their lawsuits, and they should not expect to get any compensation from the Indian government in the form of costs, damages, or interest. The government would also return the cash paid in these situations without interest if the issue is resolved amicably. T V Somanathan, the Finance Secretary, had previously stated that the retrospective tax law had resulted in a total collection of Rs 8,100 crore. Cairn Energy alone contributed Rs 7,900 crore. This money will be returned to you. If the corporations agree to these terms, the law will have a significant impact.

What is the Impact of the Taxation Laws (Amendment) Bill 2021

According to government officials, the action was intended to send a good message to the investment community by giving firms a reasonable amount of time to fix the issue. Apart from restoring India’s reputation as a fair and reliable regime, this would create an investment-friendly business climate, which will help the government generate more income over time. It is a positive step for international investors, and it will help to attract more foreign investment by making conducting business easier. The action is anticipated to terminate litigation with 17 businesses, including Vodafone and Cairn, as well as address concerns about uncertainty, allowing them to resolve any previous issues and prevent future legal expenses.

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