By Neha Choudhary
Published on: August 26, 2021 13:49 IST
Introduction
Recently in 2021, the Taxation Amendment Bill was introduced by the Finance Minister Ms. Nirmala Sitharaman in Lok Sabha on 6th August 2021. The Bill tends to amend the Income Tax Act, 1961 (IT Act) and the Finance Act, 2012. The Finance Act, 2012 amended the 1961 Act and intends to impose tax liability on the incomes that have been earned from the sale of shares of a foreign company on a retrospective basis.
However, the 2021 Bill had been proposed to abrogate the retrospective tax provision imposed on indirect transfer of assets and also suggested to amend the Finance Act, 2012 to administer validation of demand under Section 119 of the Finance Act, 2012 proposing the conditions for withdrawal or furnishing of the undertaking.
The Brief History about the Amendments before the Amendment Bill of 2021
In 2012 the Supreme Court’s order was overturned as the provision of the Income Tax Act 1961 was amended by the Finance Act 2012 in respect of the retrospective effect. In 2012 the Supreme Court mentioned through its pronouncement that, gains accumulating from indirect transfer of Indian assets are not payable (taxable) under the provisions of the Income Tax Act 1961 and thus the unavoidable and significant amendments were recommended.
Moreover, through the amendment, it has also been clarified that the gains arising from the sale of shares of a foreign company are taxable in India if the shares, directly or indirectly acquire their value considerably from Indian assets.
However, the amendments referring to the retrospective effect in the Finance Act 2012 gave rise to criticism from the stakeholders stating that the amendments are against the principle of tax certainty and can damage the reputation of India as an attractive destination. These amendments had also caused arbitration proceedings against the Government of India under various treaties.
Furthermore, it had also observed immense reactions from India and other countries around the world as the amendment has somehow created uncertainty and lack of trust among the foreign investors in India and therefore had brought a law which goes back to 1961 retrospectively. However, mentioning the amendment, the former Finance Minister Mr. Pranab Mukherji stated the alterations in the act to be clarifying in nature and even analyzed the intentions of the authorities behind the enactment of the legislature.
Moreover, the Finance Act 2012 inserted Explanations 4 and 5 under Section 9 with retrospective effect from 1st April 1962. The provision of Section 9(1)(i) of the Finance Act 2012 under its Explanation clause 5 covered all the transactions from 1961 till 2012 which involved all the transfer of the shares of the foreign company which derives its value substantially from assets located in India.
Explanation 4 and 5 of Section 9 of the Finance Act states that “Explanation 4 – For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.
Explanation 5 – For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”
In other words, an asset or a capital asset and income arising from the transfer of such asset or capital shall be deemed to be situated in India if the following conditions are fulfilled:
- The asset or capital asset is a share in a company registered or incorporated outside India.
- The share or interest derives its value substantially from the assets located in India; and
- Such value may be derived directly or indirectly from the assets located in India.
However, it has also been mentioned that the share or interest shall not be deemed to derive its value substantially from the assets located in India, if, the value of such assets are as follows:
- If the value does not exceed Rs. 10 crores,
- If the value does not represent at least 50% of the value of all the assets owned by the company or entity, as the case may be.
What is the Taxation Amendment Bill 2021?
The Taxation Laws (Amendment) Bill, 2021 was passed by the Lok Sabha on 6th August 2021 followed by the Rajya Sabha passing it on 9th August 2021. In 2021, Shrimati Nirmala Sitharaman, Finance Minister introduced a Bill in the Lok Sabha with the suggestions to amend the Income Tax Act 1961 and Finance Act 2012 in Lok Sabha.
The Taxation Laws Amendment Bill tends to nullify the retrospective tax demands which were proposed in the 2012 Act. However, the 2012 amendments and the orders passed by the honorable Supreme Court were subject to political reactions as well arguments that are aimed to be sorted via the 2021 amendment Act.
The Taxation Laws (Amendment) Act, 2021 (34 of 2021) received the assent of the President and is notified on 13th August 2021. The Act thus has sought to repeal the retrospective tax that was amended by Finance Act 2012. The Government of India through the taxation amendment Bill 2021 has been addressed to settle the tax disputes with Vodafone International Holding BV Vs the Republic of India[i] as well as in Cairn Energy PLC Vs the Republic of India[ii] and 15 other entities.
The Taxation Laws (Amendment) Bill passed in 2021 was proposed to alter the Income-tax Act, 1961 with an aim that no tax demand based on the retrospective shall be raised in the future if the transaction was undertaken before 28th May 2012 for any indirect transfer of Indian assets.
Furthermore, the Bill was imposed to nullify the demand raised for indirect transfer of assets in India made before 28th May 2012 on the fulfillment of certain conditions like withdrawal of pending litigation and undertaking furnishing to the effects that there would be no claims for cost, damages, interest, etc. It has also been introduced via the amendment Bill 2021 that the refund is to be paid in these cases without any interest under Section 244A on fulfillment of specified conditions.
The Taxation Laws Amendment Bill 2021 has revoked the retrospective amendment that has been made applicable in Section 9 of the Income Tax Act amended by Finance Act and under Section 119 of the Finance Act 2012 that cease to apply those refunds shall be made on fulfillment of specified conditions.
The following are the specified conditions:
- When the appeal has been filed before an appellate forum or any writ petition before the High Court or the Supreme Court against any order regarding the said income, the person thus filing such appeal or writ can either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;
- When any proceeding for arbitration, conciliation or mediation, has been initiated or any notice under any law has been given or any agreement has been entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, the concerned person shall either can withdraw or submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such form and manner as may be prescribed;
- The concerned person shall furnish an undertaking in a prescribed form and manner, waiving his right to seek or pursue any remedy or any claim concerning the said income available 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; or any other prescribed conditions.
Moreover, after the Bill has been passed in Lok Sabha, it is thus expected that foreign investment may be increased and investment and economic growth can be promoted.
Key Highlights of the Taxation Laws (Amendment) Act, 2021
- The Taxation Amendment Bill provides that there shall be no demand for tax in the future based on the retrospective amendment made via Finance Act, 2012, for any indirect transfer of Indian assets if the transaction was undertaken before 28th May 2012.
- The amendment Bill also provides that the demand raised for indirect transfer of Indian assets made before 28th May 2012, shall be nullified on fulfillment of specified conditions and furnishing of an undertaking.
- Furthermore, it also provides to refund the amount paid in these cases without any interest thereon.
- The Act alters the Finance Act, 2012 to provide that the validation of demand under Section 119 of the Finance Act, 2012.
- The Act also tends to empower CBDT to make rules to provide the form and manner in which an undertaking shall be submitted.
What are the Objectives of the Amendment Bill 2021?
The amendment Bill had been introduced with the view to achieving certain objectives and to ensure that the benefits can be guaranteed with these altered provisions.The benefits and the objectives achieved can be as follows:
- The Taxation Amendment Bill 2021 has aimed to settle the tax disputes with Vodafone International Holding BV Vs The Republic of India[iii] as well as in Cairn Energy PLC Vs The Republic of India.[iv]
- The alteration in the 2021 Act avoids unnecessary litigation and helps in saving the Government’s time and costs.
- This has also been observed that the amendment would boost the Government policy to have a predictable tax regime.
- The objective of the amendment Bill was to instill foreign and domestic investors with confidence in the Indian Economy.
- The Act tends to drive companies that are deciding their investments to invest in India.
- The Bill imposed would also expand the country’s goal to grow the economy up to $5 trillion economies.
- The Bill has also expected to meet the pending demand of foreign investors to remove retrospective taxation policy.
- The Act also tends to establish an investment-friendly business environment to enhance economic conditions and generate more revenue.
Conclusion
In 2021, the taxation laws amendment Bill has been passed by Lok Sabha and Rajya Sabha as the Bill has been introduced by the Finance Minister in the houses. The 2021 Bill tends to alter the provisions mentioned under the Income Tax Act 1961 and the Finance Act 2012. The Finance Act 2012 has amended the 1961 Act which aimed to impose tax liability on the incomes generated from the sale of the shares on a retrospective basis. The 2021 amendment Bill aims at altering Section 119 of the Finance Act and other Sections with specified conditions. Thus there are various objectives and benefits to be achieved for which the amendment has been proposed in 2021.
To read the Bill:
[embeddoc url=”http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/120_2021_LS_E.pdf”]Reference
[i] Vodafone International Holding BV Vs the Republic of India, CIVIL APPEAL NO.733 OF 2012
[ii] Cairn Energy PLC Vs the Republic of India, Case No 1-21-cv-00396
[iii] Ibid
[iv] Ibid