Taxation Laws (Amendment) Act 2021

By : Neha Dhyani

Updated : Apr 18, 2022, 10:20

The President of India gave his assent to the Taxation Laws (Amendment) Act 2021, doing away with a regime of retrospective taxation. According to the act, the Government of India will not lodge tax demand for any “indirect transfer of Indian assets” completed before 28th May 2012.

After the amendments to the Finance Act in 2012, the Government made tax claims in 17 cases, most notably against British telecom company Vodafone and gas behemoth Cairn Energy.

In other words, the Taxation Laws (Amendment) Act 2021 is a bold step toward resolving the long-standing desire of foreign investors for the elimination of retrospective taxation to promote tax transparency and enhance the ease of doing business in the country.

Provisions of the Taxation Laws (Amendment) Act 2021

The Taxation Laws (Amendment) Act 2021 amended the Income Tax Act of 1961 to proclaim that the Government of India will not raise any tax demand in the future for any indirect transfer of Indian assets made before 28th May 2012.

Any tax demand for the indirect transfer of Indian assets before 28th May 2012 shall be null and void. However, the corporates shall meet specific conditions like:

  1. Dismissing existing litigation challenging such tax demands
  2. The companies shall serve an undertaking that it will never file any claim for costs, damages, interest, or other compensation.

Furthermore, the Government of India will refund the full amount paid by the company as part of the retrospective law without interest.

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Events Leading to the Taxation Laws (Amendment) Act 2021

The Vodafone Group bought a 67 per cent share in Hutchison Whampoa for $11 billion in 2007. The Government of India filed an initial tax claim of Rs. 7,990 crores (Rs. 22,100 crores with penalties and interest) in “capital gains and withholding tax.”

However, the Supreme Court determined in 2012 that the Vodafone Group did not have to pay any taxes on the stake purchase. To get around the verdict, the Government of India proposed a Finance Act amendment that would allow the government to tax such transactions retrospectively.

The Permanent Court of Arbitration (PCA) in The Hague ruled in favour of Vodafone in September 2020. It directed the Indian government to pay the legal representation and assistance costs, and 4.3 million pounds in arbitration court fees to the Vodafone group.

The PCA passed a similar order in favour of Cairn Energy, directing the Government of India to pay $1.2 billion to the company.

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Significance of the Taxation Laws (Amendment) Act 2021

  • The Taxation Laws (Amendment) Act 2021 limits foreign tribunals adjudicating on Indian tax laws as the corporates shall withdraw any litigation against the retrospective taxation to get the refund.
  • The law will make the tax framework predictable and avoid retrospective taxes.
  • It is an attempt to resolve the dispute through the sovereign channels of Indian law.
  • Investors continue to be wary about retrospective taxes. This step will now help to improve the ease of doing business and boost investor confidence.
  • It will boost taxpayer faith and support India in maintaining record levels of FDI, an essential component towards achieving the dream of a $5 trillion economy.

To sum up, after a series of setbacks from international tribunals, the Government of India introduced the Taxation Laws (Amendment) Act 2021 to scrap the regressive policy of retrospective taxation. However, India has to perfect a sturdy arbitration/ dispute resolution mechanism at the domestic level to prevent such issues from reaching international tribunals.

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FAQs on Taxation Laws (Amendment) Act 2021

Q.1. According to the Taxation Laws (Amendment) Act 2021, will the Government of India refund the full amount appropriated by a company as a retrospective tax?

No. According to the Taxation Laws (Amendment) Act 2021, the Government of India will only repay the principal amount and not the interest.

Q.2. How does the Taxation Laws (Amendment) Act 2021 benefit the government?

The Taxation Laws (Amendment) Act 2021 will end the ongoing and past litigations challenging such tax claims and will prevent future costs from arising from the same.

Q.3. What is the aim of the Taxation Laws (Amendment) Act 2021?

The Taxation Laws (Amendment) Act 2021 aims to scrap the 2012 amendment to the Finance Act, introducing retrospective taxation.

Q.4. Which Acts does the Taxation Laws (Amendment) Act 2021 amend?

The Taxation Laws (Amendment) Act 2021 amends the Income Tax Act of 1961 and the Finance Act of 2012.

Q.5. When did the President of India endorse Taxation Laws (Amendment) Act 2021?

The President of India signed the Taxation Laws (Amendment) Bill, making it an Act on 13th August 2021.