Taxation Laws (Amendment) Act 2021: Origin & Traces

The Union government came up with the Taxation Laws Amendment Bill 2021, which seeks to alter the Income-Tax Act of 1961 – taxation law of India. The Bill, which was approved by both the Lok Sabha as well as Rajya Sabha, intends to permanently bury the taxation law- 2012 Income Tax legislation modifications that were about retrospectively tax amendments. The Bill has received Presidential assent {Taxation Laws (Amendment) Act 2021}. The contentious retrospective tax reforms dogged large international businesses like Vodafone and Cairn Energy with billions of dollars in tax demands, harming India’s reputation as an investor-friendly country.

Background

2007: Vodafone paid $11 billion in May 2007 for a 67 percent interest in Hutchison Whampoa. This includes Hutchison’s mobile phone business as well as other Indian businesses. The Indian government issued a claim for Rs 7,990 crore in capital gains and withholding tax from Vodafone in September of that year, alleging that the firm should have deducted the tax at source before making a payment to Hutchison. In the Bombay High Court, Vodafone contested the demand notice, but the court decided in favor of the Income Tax Department. Vodafone then appealed the High Court’s decision to the Supreme Court.

2012: Vodafone appealed the High Court decision to the Supreme Court, which decided in 2012 that the Vodafone Group’s interpretation of the Income Tax Act of 1961 was accurate and that the share purchase was tax-free

2012: The then-Finance Minister, the late Pranab Mukherjee, got around the Supreme Court’s decision by proposing a change to the Finance Act, allowing the Income Tax Department to tax such transactions retrospectively. Parliament enacted the Act that year, and Vodafone was responsible for paying the taxes. By that time, the case had earned the moniker of the “retrospective taxation case.” Investors across the world have slammed the proposal, calling it “perverse.”

2014: India and the Netherlands signed a Bilateral Investment Treaty (BIT) in 1995. The Vodafone Group had filed a complaint with the Court of Arbitration against India, citing Article 9 of the India-Netherlands Bilateral Investment Treaty.

2020: The arbitration panel stated in its decision that since India had been found to have violated the terms of the agreement, it must immediately cease all efforts to recover the taxes from Vodafone. Any effort by India to execute the tax demand would be a breach of the country’s international law responsibilities, according to the Permanent Court of Arbitration in The Hague.

Dec 2020: According to press sources, India has appealed the international arbitration court’s decision in favour of Vodafone Plc in the retrospective tax dispute. The appeal was filed in a Singapore court on December 21.

What is retrospective taxation?

Retrospective taxation permits a country to enact legislation/ taxation law taxing specific products, items, services, and transactions from a date prior to the law’s enactment, and to charge businesses from that date forward. Countries adopt this route to address any inconsistencies in their tax regulations or taxation law that have previously allowed businesses to exploit loopholes. While governments frequently utilize retrospective amendments to tax laws to “clarify” existing laws, it often harms businesses that had consciously or unknowingly interpreted the rules differently.

Bilateral Investment Treaty

On November 6, 1995, India and the Netherlands signed a Bilateral Investment Treaty (BIT) to promote and protect the investment by Indian and Dutch enterprises in each other’s territory. It guarantees that enterprises operating in each other’s countries will receive “fair and equitable treatment at all times” and will “enjoy full safety and security in the territory of the other.”

Vodafone used it because its Dutch unit, Vodafone International Holdings BV, had purchased Hutchinson Telecommunication International Ltd.’s Indian business interests. As a result, it was a transaction between a Dutch and an Indian company.

Taxation Laws (Amendment) Act 2021

Section 2 of the Taxation Laws (Amendment) Act, 2021 amends Section 9(1) (i) of the Income Tax Act 1961. Under Explanation 5 to Section 9(1) (i) intends to insert three provisos (Fourth, Fifth, and Sixth Proviso) to provide relief to certain qualifying companies impacted by the aforementioned retrospective amendment. These revisions propose that the provisions of India’s indirect asset transfer laws do not apply to assets transferred prior to May 28, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). As a result, all pending assessments will be regarded complete without any increases for such income. If assets located in India are indirectly transferred before May 28, 2012, the retrospective impact of Explanation 5 to Section 9(1) (i) of the Income Tax Act 1961 will be ignored. As a result, income derived from or flowing from such an indirect transfer of Indian assets or capital assets is not taxable in India. As a result, all assessments or rectification petitions pending with the authorities, to the extent that they relate to the computation of income from indirect transfers of assets, are presumed to be completed without any additions.

The Sixth Proviso states that if any money becomes recoverable to such an individual, it will be refunded to him, but no interest will be paid under section 244A on that amount. Only those assessee who meets the following criteria will be granted relief in cases of completed assessments:

1. If the assessee has filed an appeal or a writ petition before the High Court or the Supreme Court against any ruling relating to said income, he must either withdraw or make an undertaking to withdraw such appeal or writ petition in the form and manner provided.
2. If the said person has initiated or given notice of any proceeding for arbitration, conciliation, or mediation under any law currently in force or under any agreement entered into by India with any other country or territory outside India, whether for investment protection or otherwise, he shall either withdraw or submit an undertaking to withdraw the claim.
3. the said person shall provide an undertaking in the form and manner prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or claim in relation to the said income that may otherwise be available to him under any law currently in force, in equity, under any statute, or under any agreement entered into by India with any country or territory.
4. other conditions as may be prescribed.

A validation clause was included in Section 119 of the Finance Act, 2012, to validate all demands raised/notices sent in connection with the indirect transfer of assets. It also states that any decision by a court, tribunal, or other body, including the Supreme Court’s ruling in the Vodafone case, that an indirect transfer does not fall within the scope of Section 9(1)(i) of the Income Tax Act 1961, will be disregarded.

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By inserting a proviso to Section 119 of the Finance Act, 2012, the Taxation Laws (Amendment) Act 2021 proposes a consequential adjustment to the foregoing provision. It states that if a person meets specific circumstances, such as withdrawing or providing an undertaking to withdraw pending litigation and providing an undertaking that no claim for costs, damages, or interest will be made, this section will no longer apply to them.

Parliament power to annul the judgment of the highest court in India?

According to the government, the amendment to the taxation law intends to address the flaws identified in the verdict. “It is always open to Parliament to introduce new legislation or to bring in revisions to the current law to get over the basis of a judgment,” said A.R. Lakshmanan, a former Supreme Court judge. Such retroactive revisions have been upheld by the Supreme Court on multiple occasions.

In Janapada Sabha Chhindwara v. Central Provinces Syndicate Ltd. & Anr., it was held that it is permissible for the legislature to amend the provisions of an Act retrospectively and declare what the law should have been, but it is not permissible for the legislature to declare that a judgment of a court properly constituted and rendered in the exercise of its powers in a matter brought before it is ineffective and the interpretation of the law should be omitted. In I.N. Saksena v. State of Madhya Pradesh and Indian Aluminum Co. v. State of Kerala. The test of judging the validity of the amending and validating enactment is, whether the legislature enacting the validating statute has competence over the subject matter; whether by validation, the said legislature has removed the defect that the Court had found in the previous laws; and whether the validating law is consistent with the provisions of Part III of the Constitution. In Lohia Machines Ltd. v. Union of India. The effect of the judgments of the Court can be nullified by a legislative act removing the basis of the judgment. Such a law can be retrospective. A retrospective amendment should be reasonable and not arbitrary and must not be violative of the fundamental rights guaranteed under the Constitution.

Nancy Srivastava is working as a Research Associate under DPIIT-IPR Chair, Indian Institute of Technology (IIT), Roorkee, has LLM in Constitutional Law from Maharashtra National Law University (MNLU) Aurangabad and B. Com LL.B. in Taxation Law from UPES Dehradun.

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