“Our government is ready to take the biggest risk in the interest of the nation. GST was stuck for so many years only because those who earlier in the government could not muster up the courage to take political risks. We not only implemented GST but today we are witnessing record GST collection. Recently, we decided to scrap retrospective tax which was praised by the industry. It will strengthen the bond between the government and industry” — These powerful words by Prime Minister Narendra Modi at the recent CII meet sum up the essence of the Modi government’s economic philosophy is based on taking calculated risks for the greater good.
The historic retro taxation Bill passed by the Modi government in the Monsoon Session of Parliament in 2021 proposes to eradicate the tax rule that gave the tax department power to go decades back and levy capital gains wherever ownership had changed hands overseas, but business assets were in India. The Taxation Laws Amendment Bill, which seeks to nullify retrospective tax demands raised on companies, will enhance investor confidence, boost FDI and provide the much needed fillip to India’s goal of becoming a $5 trillion economy.
The Taxation Laws (Amendment) Bill, 2021 seeks to withdraw tax demands made using a 2012 retrospective legislation to tax the indirect transfer of Indian assets and also refund the amount paid in these cases without any interest. The 2012 legislation was used to levy a cumulative of Rs 1.10 lakh crore of tax on 17 entities, including UK telecom giant Vodafone and Cairn. It would spur companies, which are at the cusp of deciding to invest in India, will avoid unnecessary litigation and save time and costs of the government, besides boosting the policy of predictable tax regime.
The Taxation Laws (Amendment) Bill provides for the withdrawal of tax demand made on ‘indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e. the day the retrospective tax legislation came into being).’ Rules will be framed under the law giving a reasonable timeframe for the companies to come and give an undertaking to the government that they will not pursue the cases. They will also have to give an undertaking that they agree to forego the interest on amounts collected.
The Modi government’s bold move to bury the controversial retrospective taxation, one of the worse legacies of the Congress-led UPA regime, will provide relief to companies who undertook indirect transfer of assets before May 28, 2012. But India still continues to retain its sovereign right to taxation under the Section 9(1)(i) of the Income-tax Act. Removal of retrospective taxation will also provide clarity for deals between companies of countries where such deals are not covered under double taxation avoidance agreements (DTAA).
Any indirect transfer of assets where underlying assets are in India, the tax is payable in India and accordingly they will arrange their assets. That is tax planning as far as the future is concerned. In the future, the amendment in the law is now settled, and one can arrange the assets in a manner that tax liability is reduced to the minimum, which is a great news. The immediate beneficiaries would be those who did their transactions before 2012 and from them the government will not collect the tax. And if collected, it will be refunded.
The inept Congress government had in 2012 retrospectively amended the Income-tax Act. This was in response to a Supreme Court verdict, which had held that Vodafone cannot be taxed for a 2007 transaction that involved its purchase of a 67% stake in Hutchison Whampoa for $11 billion. Later in 2014, the Congress government again used the same section to raise tax demand against Cairn Energy Plc for restructuring done in 2006. The Modi government has corrected a historical wrong that was almost nine years old. Following the retrospective amendment, the total amount involved in litigation for all cases is about Rs 8,100 crore, of which about Rs 7,900 crore is related to the Cairn dispute alone. The Bill would withdraw the retrospective amendments to the Income-tax Act that had raised demands on Vodafone, Cairn and some others, indicating the Modi government’s move to attract foreign investments and ease procedural bottlenecks.
The Modi government has proposed amendments to the Income-tax Act and Finance Act, 2012 to effectively state that no tax demand shall be raised for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012. The demand raised for indirect transfer of Indian assets made before May 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of an undertaking for withdrawal of pending litigation, and furnishing of an undertaking to the effect that no claim shall be filed. Section 9(1)(i) of the Income-tax Act states that any income accruing or arising outside India due to a business connection in India is deemed to accrue or arise in India and shall be taxable in case of all assessees irrespective of their residential status. Companies are now expected to withdraw their litigation claims for deals prior to 2012, with a clear and definitive tax regime that will help in boosting Foreign Direct Investment (FDI).
“It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination,” the statement on the objects and reasons of the new Bill reads. There is Vodafone, where the amount is Rs 45 crore and there is WNS Capital, where the sum involved is about Rs 48 crore. In the case of Vodafone, while the total tax demand (including interest and penalty) was Rs 22,000 crore, the government is accounting for Rs 45 crore spent by the telco towards the legal fee. Vodafone had won the case in the international arbitration tribunal last year against which the Indian government appealed. The appeal is now likely to be withdrawn. Reversing the 2012 retrospective law on indirect transfers of downstream assets in India is an excellent step by Prime Minister Narendra Modi and his government.
Honouring the arbitration award is a step in the right direction and a clear signal to foreign investors that tax certainty will be the order of the day going forward. The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand would be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012, the date on which the Finance Bill, 2012, received the assent of the President, says the statement of objects and reasons of the legislation.
The Tribunals Reforms Bill that seeks to abolish many appellate tribunals set up under various Acts is another historic Bill passed by the Parliament in the monsoon session.
Among the Tribunals that the Bill seeks to abolish include, the Film Certification Appellate Tribunal, Airports Appellate Tribunal, Authority for Advanced Rulings, Intellectual Property Appellate Board and Plant Varieties Protection Appellate Tribunal. The functions of these tribunals will be transferred to the existing judicial bodies. The tribunals under the Geographical Indications of Goods (Registration and Protection) Act, 1999 and the Control of National Highways (Land and Traffic) Act, 2002, would also be wound up, once this Bill becomes a law. All cases pending before such tribunals or authorities will be transferred to the Commercial Court or High Court.
The Bill proposes to include provisions related to the composition of selection committees and term of office in the Act itself. According to Section 3 (7) of the Bill, the Chairperson and the Members of the various tribunals are to be appointed on the recommendations of the Search-cum-Selection Committee. The Bill amends the Finance Act, 2017 to specify that the members of the committee will be (i)Chief Justice of India, or a Supreme Court Judge nominated by him, as the Chairperson, (ii)two secretaries nominated by the central government, (iii) the sitting or outgoing Chairperson, or a retired Supreme Court Judge, or a retired Chief Justice of a High Court, and (iv) the secretary of the Ministry under which the Tribunal is constituted, according to PRS Legislative Research.
The state tribunals will have separate search-cum-selection committees. These Committees will consist of (i) the Chief Justice of the High Court of the concerned state, as the Chairman (ii) the Chief Secretary of the state government and the Chairman of the Public Service Commission of the concerned state, (iii) the sitting or outgoing Chairperson, or a retired High Court Judge, and (iv) the Secretary or Principal Secretary of the state’s general administrative department. The Centre has to decide on the recommendations of selection committees preferably within three months from the date of the recommendation. The Tribunal Reforms Bill provides for a four-year term of office (subject to the upper age limit of 70 years for the Chairperson, and 67 years for members). Further, it specifies a minimum age requirement of 50 years for the appointment of a chairperson or a member.
It would be apt to end with PM Modi’s quote where he said: “Today’s new India is ready to move with the new world. India which was once apprehensive of foreign investment, today it is welcoming all kinds of investment,”. Effectively speaking, Modinomics is inclusive and reforms under the Modi government are being ushered in out of conviction and not any compulsion.
(The views expressed in this article are those of the author and do not represent the stand of this publication.)
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