September 19, 2021

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

Move to do away with infamous retro tax will boost investment sentiments

In the current Covid times, the Indian government has been introducing major reforms on the taxation front with a view to create a positive investment environment. Few reforms have been intended to simplify some of the old and archaic taxation structure while others to incentivise businesses and enhance investments.

Given the efforts of the government for quicker recovery of economy reeling under the effect of Covid-19, the Bill introduced in the Parliament on Thursday to do away with the infamous amendment on taxation of indirect transfers, brings in much needed certainty and comfort for the foreign investors on doing business in India.

In January 2012, in a landmark judgment in Vodafone’s case, the Indian headed by the then Chief Justice, ruled that transfer of shares of a company incorporated outside India would not be taxable in India due to absence of situs of shares in India and more importantly, absence of charging provisions to such transfers. However subsequently, the UPA government in its Budget of 2012 introduced an amendment making indirect transfers taxable in India purportedly clarifying the legislative intent which in effect nullified the ruling of the Apex Court.

This in essence meant that capital gains arising from transfer of shares of a foreign entity deriving substantial value from assets located in India were chargeable to capital gains in India. The threshold for computing ‘substantial value from India’ was later defined to be fifty percent of the value of the shares of the overseas entity sought to be transferred. This led to tax demands being raised in seventeen cases including Cairn Energy Plc and Group and more importantly, affecting sentiments of foreign investors for lack of certainty due to government making changes retrospectively in tax laws.

ALSO READ: Govt to amend Income Tax Act to nullify retrospective tax demands

In line with its commitment to make India an investor friendly destination, the Hon’ble Finance Minister has now taken a major step by proposing to do away with the draconian retrospective applicability of indirect transfer law.

The Bill now introduced in the Parliament proposes to provide that no tax demand shall be raised on indirect transfers effected prior to 28th May 2012. Further, in cases where demands have been raised applying the retrospective amendment, the same shall be nullified on fulfilment of specified conditions.

The prescribed conditions include furnishing of undertaking for withdrawal of pending litigation including international arbitrations, waiver of costs, damages, interest, etc. against the government.

ALSO READ: Investors breathe easy, no more retrospective taxation

It has also been clarified that no interest shall be paid to the taxpayers while refunding the moneys paid under protest during the pendency of indirect transfer disputes before any forum. Having said so, the Bill does not deal with situations relating to taxpayers who may have settled their disputes under the income tax amnesty scheme.

It is worth noting that the International Arbitration Tribunal ruled in favour of Cairn and holding that India did not fulfil its obligations under the Bilateral Investment Protection Agreements. While award is not in public domain, Cairn succeeded in being awarded $ 1.2 bn which included refund of taxes recovered during the pendency of the dispute. Also, recent confirms that Cairn has successfully enforced part recovery of its award by seizing Indian government’s assets in foreign jurisdictions. Though the Indian government’s appeal against Cairn and Vodafone arbitration award is pending before foreign Courts, the same may not be pursued further if these parties decide to comply with the conditions prescribed under the proposed Bill.

Over the next few days, much will be debated on whether this move will enhance India’s position as an investment hub in global stage. Nonetheless, this Bill does bring about much needed confidence to the foreign investors and assist India on its path to economic recovery post Covid.


(Arvind Rajan, senior tax professional with EY India has also contributed to this article. Views expressed are personal.)

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Share This :