In recent times the Taxation Laws (Amendment) Act, 2021 brought about required
changes regarding the country’s perception vis-a-vis taxation jurisprudence and
especially retrospective taxation jurisprudence. This specific amendment was brought
after the earlier taxation provisions which were brought around the year 2012 qua
retrospectively taxing indirect capital transfers.
That it is important to note that vide earlier ruling the Hon’ble Supreme Court
in Vodafone International Holdings casei held that indirect transfer of shares of an Indian
company vide an international transaction, cannot be taxed as capital gain and would not
fall under the purview of section 9(1)(i) of the Act (ii). However the legislature in 2012
brought amendments in the Finance Act, 2012 which allowed the government to
retrospectively tax indirect capital transfer of shares situated even outside the country
when a substantial interest is derived from assets in India. Capital gain by way of indirect
transfer of capital asset also came in the ambit of such retrospective taxation back then.
Henceforth assessment notices from tax authorities were retrospectively applicable back
then.
However the new Taxation Laws (Amendment) Act, 2021 is bringing tax certainty and
will ensure that once certain conditions of the Act are fulfilled, the pending Income-tax
proceedings shall be withdrawn against the Assessee and/or demand, if any will be
nullified while the amount collected will be refunded to the Assessee without any
interest. The new amendment ensured that no tax demand shall be raised in future on the
basis of the amendment to section 9 of the Actiii made in the Finance Act, 2012 for any
offshore indirect transfer of Indian assets if the transaction was undertaken before May
28, 2012. It also ensured that the demand raised for offshore indirect transfer of Indian
assets would be “nullified on fulfillment of specified conditions” such as the withdrawal of pending litigation and an undertaking that no damage claims would be filed, this being
an important aspect as various international arbitration claims were being made against
Indian assets outside of India.
India has been part of several treaties and the earlier retrospective taxation laws of 2012
were in violation of these treaties. Hence later on these treaties were invoked by private
companies thus resulting in decline in India’s ease of doing business ability. Therefore
the introduction of the Taxation Laws (Amendment) Act, 2021 by the legislature should
augment India’s image as an investment destination for foreign business. The new
amendment law is providing clarity to international investors about the business
environment in the country. The same will also create a sense of credibility for the
country in the international arena. India can also be seen more committed towards the
investment environment and against tax terrorism, which still haunts the investor
community. Upcoming sectors such as telecom and oil exploration will get boost due to
this aforesaid amendment act as major companies looking for investment will mostly be
from these sectors.
The refund initiative through the amendment act will also be of keen
interest for companies which were at the wrong end of the retrospective taxation laws.
The taxation laws are often seen as severe as criminal laws especially when retrospective
amendments are brought in. There have been instances when retrospective taxation laws
have been upheld, but the wider ramification effect on the investment climate on the
country should also be taken care of by the Government.
Retrospective taxation laws do not help in creating business friendly environment, in fact it deters investment opportunities. The new initiative of 2021 aims to establish an investment-friendly business environment in the country with lucrative opportunities for foreign investments in India. Thus India retains its reputation thereafter in the business circles. It is with this thought process that the business circle can be asked to invest in India rather than an environment of uncertainty where tax authorities can make demands vis-a-vis any date from the past.
Apart from the above to have a clear stance for a clean welcoming business environment regarding retrospective laws, India also needs to have fluctuating trade tariffs or shifting Goods And Service Tax (GST) rates to show greater clarity and consistency in policy for future investment proposals. There should ideally also be greater sense of assurance towards the business community that retrospective taxation laws which can harm the business community will ideally not be brought again by the Government. Apart from this it will also help India to create a clear dispute resolution mechanism in cross-border transactions so that international jurisdictional problems can be avoided and effective dispute adjudication can take place for both parties which will save time & cost.
Taxation laws are the pathways which will help India in creating an economy which will
help its growth in the coming decades and will ensure that the growth continues. It is also
mostly via taxation laws only that any foreign investor decides the investment capacity in
India and the investment opportunities that can be utilized here in India. It is therefore
very prudent to have such tax laws in place which not only support the existing
investment cycle in India and the business circle but also provides incentive to other
international business leaders who are looking for investment proposals in India but are
not sure on whether to enter India or not. An easy taxation process which the current
system is relatively offering can help in great length to that effect.