Withdrawal of Retro Tax: What It Means for Current and Potential Investors
STORIES, ANALYSES, EXPERT VIEWS
On August 5, 2021, parliament passed the Taxation Laws (Amendment) Bill, 2021 to amend Section 9 of the Income Tax Act, 1961 (ITA). Section 9 provides for taxation of income considered to have been derived from India under strict nexus rules.
This part of the statute came under controversy in 2012 when the then government retrospectively amended it to include within its scope offshore indirect transfer of shares that derive substantial value from assets in India.
This was in response to the Supreme Court's judgment in Vodafone where the apex court held that capital gains from offshore indirect share transfer do not fall within the scope of the Indian law.
The government disagreed with the judgment and found it inconsistent with the legislative intent. Post the 2012 amendment, several investors approached international investment tribunals to seek redressal and two of these disputes, Vodafone, and Cairn were decided in favour of the investors.
With the outcome of awards emerged a belief that India's taxation policies are not investor-friendly and are negatively impacting the current and potential investment environment.
Hence, writes Mukesh Butani (Managing Partner at BMR Legal) “the 2021 Act is as an attempt to regain the investors' trust and avoid India from getting locked in international disputes, including its assets getting attached as a result of enforcement of awards.”
The 2021 Act proposes to nullify the tax demands made due to the retrospective amendment of 2012 and refund taxes collected so far.
The proposal is contingent on respective parties withdrawing their claims before domestic or international dispute forums and desisting from any future claim. It also states that the refund is only limited to the tax collected, hence, discharging the government from any liability towards interest, costs, or damages.
Tax landscape in India is undergoing crucial changes
But it should be understood that the tax landscape in India, says Butani “is undergoing crucial changes with the lawmakers consistently emphasising on the need for investor certainty and trust.
“For instance, the 2020 introduction of the Taxpayers' Charter that enlists the rights and obligations of a taxpayer, aims to build trust between the taxpayer and revenue.
“The retrospective amendment stood out as a roadblock for achieving these objectives. Building upon the 2021 Act, apart from settling the current disputes, the government must ensure that the revamped, domestic and international approaches to mitigate tax controversies and resolve disputes are implemented effectively and are accessible by current and potential investors.”
Incorporation of international best practices in tax law and administration can help place India at the peak of foreign investments, giving a further boost to the aspirations to the 1.2 billion strong nation.
