The Taxation Laws (Amendment) Bill, 2021, was passed by Parliament recently. It seeks to amend the provisions of the Income Tax Act, 1961, and the Finance Act, 2012. Provisions have been inserted vide the above-mentioned amendment to the effect of removal of retrospective application of rules of taxation on any income that might arise out of transferring of shares or interest in a foreign company where the asset or capital asset is substantially located in India.
In 2012, Vodafone International Holdings BV had filed a case against the Union of India, due to imposition of retrospective tax on its acquisition of shares (nearly 67%) in Hutchison Essar Limited. The Supreme Court ruled in favour of Vodafone and stated that wherever such indirect transfers are supposed to be covered by the tax legislation, it has been expressly provided so. For instance, under Section 64, in computing the total income of the individual, the provision is clear that it includes both direct and indirect income of an individual. Under Section 9, which deals with the situations mentioned above and which is also the subject of the current amendment, there was no explicit provision to cover situations of indirect transfers. It further ruled that the transfer in the said case cannot be covered as it fails to satisfy the resident test and the source test.
After the apex court’s ruling in favour of Vodafone, in May 2012, the legislature passed the amendment, which was at that time called ‘an amendment which was clarificatory in nature’ as to the provisions of Section 9 and sought to include taxation of gains from such indirect transfers retrospectively.
Till date, this was the law and it has been frowned upon by many. This retrospective amendment has not only had a negative impact domestically but also led to India breaching its international treaty obligations. Consequently, it has also led to successive litigations outside India where the government has been arraigned as a respondent. In September last year, Vodafone had already won the arbitral award against the government under the India and Netherlands Bilateral Investment Treaty. And under the UK-India Bilateral Investment Treaty, Cairn Energy PLC commenced arbitration proceedings against the Government of India, where the claim essentially rested on the illegality of the retrospective legislation and violation of principles of international trade law such as failure to provide fair and equitable treatment. The award by the Arbitral Tribunal so constituted was announced in favour of Cairn Energy PLC for $1.2 billion plus the interest and costs in December 2020. Although India did appeal against the award, the question was whether it would want to continue to accept the retrospective application of the provision.
The positive step of scrapping the inequitable provision was imminent after the passing of the award in favour of Cairn. More than 10 entities would now benefit from this provision, Cairn and Vodafone being the biggest stakeholders, and this would be a possible out from the 17 ongoing cases against the government. The conditions attached to the claiming under the provisions of the new law are: the company would withdraw or file an undertaking of withdrawal from pending litigation against India and the furnishing of another undertaking stating that the company would not file any claim for cost, interest or damages. Under the new law, the amount already deposited under the old law by the companies will be refunded to them without taking into account the interest.
It is pertinent to note that the tax law is one of the measures for the assessment of ease of doing business in a particular country and performing better in this index is one of the visions that the new India seeks to achieve. This corrective measure should form a part of the larger series of measures that should be taken by the government to send out a positive signal to foreign investors and avoid any prospective litigation in this regard. This step is slightly delayed but still comes at an acceptable time. As India is struggling with stabilising its economy owing to Covid-19, foreign investments in this growing economy could put the country in a better position.
This is also clear from the Statement of Objects and Reasons as mentioned in the Bill. All said and done, the government has dealt with this precarious situation in a practical manner because unstable economic laws are not desirable in any economy.
Kavya Lalchandani
Legal scholar based out of Delhi