On 5th August 2021, the Government of India introduced the Taxation Laws (Amendment) Bill, 2021 (“Bill”) in order to scrap the controversial law that taxed global firms retrospectively under the Income Tax, Act, 1961 (“Act”). Back in 2012, the international companies that had acquired assets of Indian companies were taxed retrospectively.
The retrospective provisions pertaining to the taxing of income under the Act resulted in uncertainty in the tax system which potentially damaged India’s standing as a destination for the business and/ or investment. The system had become a sore point for investors and was a repetitive point of litigation.
The proposed Bill will potentially address the multibillion-dollar tax cases like Vodafone and Cairn Energy and will boost investor confidence since it will resolve 17 tax payment disputes amounting to 500 billion rupees ($6.7 billion) as per Thomson Reuters.
Under the Bill, the following changes have been proposed:
- No retrospective tax demand shall be made for any indirect transfer of Indian assets if that particular transaction has taken place before May 28, 2012;
- The demands for indirect transfer of assets made before May 28, 2012, shall be nullified or fulfilled by withdrawing or furnishing an 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;
- The Bill further aims at refunding the amount accumulated without interest; and
- The Bill further aims to amend Section 119 of the Finance Act, 2012 (“Finance Act”) so as to provide that the validation of demand, etc., under Section 119 of the Finance Act shall cease to apply on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc., shall be filed.
Before this Bill, the demand for income tax has been called out in 17 cases. These cases are being contested under courts at jurisdictions. In four cases arbitration under the bilateral investment protection treaty (the United Kingdom and the Netherlands) have been invoked. The other two assessments are pending due to stay put by the respective Hon’ble High Court. In the other two cases, an arbitral tribunal has ruled for the taxpayer and has quashed the demands of the income tax department.
The most financially notable cases amongst these 17 are the Vodafone and Cairn case. Vodafone has also been involved in a $ 2.9 billion conflict with the government of India and Cairn which leads with their oil and gas operations in India, was awarded $ 1.2 billion as an arbitral award at Hague.
The proposed changes have been brought forward by Government in order to settle the monetary disputes amicably by addressing them through Indian law rather than to comply with international arbitration whose jurisdiction it has long contested. Cairn at present has noted the situation and is monitoring the situation before taking any further steps.
Back in the early 2000s custom tariffs and excise duties were relaxed to a great extent as a result of India’s commitment to the World Trade Organization (WTO) in relation to the rationalization of indirect taxes. Foreign Direct Investment in various sectors was welcomed in India. With a large amount of foreign investment coming into India, the income from non-residents entities was identified as a great source of revenue in India which ultimately led to the increase in corporate taxes. However, tax disputes have taken India into prolonging litigation with the foreign investors and/ or entrepreneurs as they were burdened because of the taxation on their source of income arising from India. While the sovereign rights of the home country need to be respected, at the same time they must be balanced with the expectations of the entrepreneur and/or investors who decide to invest in a country only on the basis of tax laws that are prevailing at that time. Hence, there is a pertinent need to balance both these interests i.e., the interest of the nation as well as of the foreign investors.
While taxing entities situated outside is a source of great gain, the tax regime of any nation should be well functioning and predictable and, in its absence, the foreign investors are reluctant to invest as it gives them uncertainty. Due to Covid-19, India is suffering from an economic slowdown. Therefore, the proposed changes are brought in order to ensure India is a welcome space for investments. The finance minister Ms. Nirmala Sitharaman has stated that the Indian economy is at a juncture where quick recovery is the need of the hour. Hence these changes intend to boost the investments in the Country and to put the Indian economy on the path of recovery.