Rajya Sabha returns Taxation Laws (Amendment) Bill after discussion

Union Finance Minister Nirmala Sitharaman said that the bill was brought in the wake of Supreme Court’s judgments. She said that the Sovereign rights of India to tax will remain intact and there will be no dilution in it with this legislation. 

Created On: Aug 10, 2021 17:32 IST
Nirmala Sitharaman
Nirmala Sitharaman

The Rajya Sabha on August 9, 2021 returned the Taxation Laws (Amendment) Bill, 2021 after a brief discussion. Taxation Laws (Amendment) Bill, 2021 seeks to withdraw tax demands made under the 2012 retrospective tax legislation to tax the indirect transfer of Indian assets

Union Finance Minister Nirmala Sitharaman said that the bill was brought in the wake of Supreme Court’s judgments. She said that the Sovereign rights of India to tax will remain intact and there will be no dilution in it with this legislation. 

The Opposition including Congress, TMC, DMK and Left parties had staged a walkout during the discussion and passage of the bill saying that there was not enough time for members to prepare for a discussion on the  legislation.

The Taxation Laws (Amendment) Bill, 2021 seeks to amend the Income-Tax Act, 1961, and the Finance Act, 2012 and withdraw contentious retrospective tax demand provision.

The Lok Sabha had passed the bill earlier on August 6, 2021. The bill proposes to amend IT Act to provide that "no tax demand shall be raised in future on basis of said retrospective amendment for any indirect transfer of Indian assets if transaction before 28th May, 2012".  The Finance Act 2012 had received the assent of the President on May 28, 2012.

Taxation Laws (Amendment) Bill, 2021: Key Highlights 

•Taxation Laws (Amendment) Bill, 2021 seeks to withdraw tax demands made under the 2012 retrospective legislation to tax the indirect transfer of Indian assets

•The bill proposes that any demand raised for indirect transfer of Indian assets made before May 28, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest shall be filed. 

•The bill proposes to refund the amount paid in these cases without any interest. 

•It also proposes to amend the Finance Act, 2012 to provide that the validation of demand under section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified conditions.

•The Bill states that the issue of taxability of gains arising from the transfer of assets located in India through the transfer of shares of a foreign company was a subject matter of protracted litigation.

Significance

•The bill is likely to benefit many companies including Vodafone and Cairn Energy who had to pay tax based on the retrospective tax demand provision. 

•The amendment will have a direct bearing on the long-running tax disputes with Cairn Energy Plc and Vodafone Group.

•As per the amendment, the centre will withdraw all back tax demands on companies such as Cairn Energy and Vodafone and will refund the money collected to enforce such levies.

•This is crucial as the country stands at a juncture today when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment will play a significant role in promoting faster economic growth and employment.

Background 

•The Supreme Court had in 2012 given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the existing provisions of the Income Tax Act 1961.

•The provisions of the Income Tax Act, 1961 were amended by the Finance Act, 2012 with retrospective effect, to overturn the Supreme Court verdict and clarify that gains arising from the sale of shares of a foreign company is taxable in India if such shares, directly or indirectly, derive their value substantially from assets located in India.

•The amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to the retrospective effect given to the amendments.

•There were arguments that such retrospective amendments militate against the principle of tax certainty and damage India's reputation as an attractive destination.

•While the Indian government has brought major reforms in the past few years in the financial and infrastructure sector to create a positive environment for investment, the retrospective clarificatory amendment continued to be a sore point with potential investors.

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