Government to Scrap Retrospective Taxation

The government has now decided to do away with the controversial retrospective tax law on the indirect transfer of assets. A bill to make this law prospective, i.e. applicable in the future rather than backward, has been put up in Lok Sabha to amend the Income Tax Rules. 

As a part of this bill, the government has proposed to refund the amount spent on the litigation by the companies; however, this refund will be without any interest. 

While this is a welcome step by the government, it remains to be seen if investors who have obtained the judgement in their favour along with the interest component will take up the offer.

This bill, on approval, will withdraw the retrospective tax laws with the present demands totalling approximately Rs.8,100 crore on companies like Vodafone, Cairn Energy and some others. 

This move comes just after the chairman of the Aditya Birla Group proposed to transfer the group’s ownership in Vodafone-Idea to any public or private sector entity. 

The Vodafone case dates back to 2007, when the telecom acquired the Indian assets of Hutch. The subject matter of the litigation was the taxability of gains on the transfer of assets located in India through a transfer of shares of the foreign company. In 2012, the Supreme Court had passed a judgment favouring not taxing the gains arising on the indirect transfer of Indian assets.

However, the then UPA government amended the provisions of the Income Tax Act through the Finance Act 2012 retrospectively, bringing the gains from the sale of shares of a foreign company under the purview of tax if such claims derived their value directly or indirectly from the assets located in India.

Also, in the last month, the Supreme Court had rejected petitions by the telecom company to rectify errors in calculating adjusted gross revenue (AGR) related dues payable by them.

This bill proposes to amend the Income Tax Act, 1961. No tax demand for retrospective tax laws will be raised in the future for any indirect transfer of Indian assets in case of transactions before 28th May 2012, the date of assent of Finance Bill 2012 by the President. 

According to the bill, any demand raised before 28th May 2012 related to indirect transfer of assets in India would be nullified on fulfilling specified conditions. These conditions include withdrawing pending litigation and submitting an undertaking that such companies shall file no claim for cost, damage, or interest.   

The move will put a lot of uncertainty to rest; however, it should not have taken nine years to reach here. Further, this new bill is expected to cheer up global investors. The retrospective tax laws impose a threat on the principle of tax certainty, thereby keeping away foreign investors from the country. It is expected to encourage tax certainty and showcase our country as an attractive destination for potential investors as a welcome step. 

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