Prior to 2012, the issue of taxability of gains arising from transfer of shares of a foreign company deriving substantial value from assets in India (indirect transfer) was a subject matter of intense litigation in India.
TIn January 2012, in a landmark judgment, the Indian Supreme Court (SC), in the case of Vodafone BV[1] ruled that transfer of shares of a company incorporated outside India would not be taxable in India[2].
However, considering the fact that the verdict of the SC was inconsistent with the legislative intent, Government of India (GoI) introduced certain “clarificatory” changes to the Income Tax Act (ITA) vide Finance Act, 2012 (FA 2012) with retroactive effect from 1 April 1962, to clarify that transfer of shares or interest in a foreign entity would be taxable in India, if such shares derive substantial value from assets located in India[3].
Pursuant to such amendment, the Indian tax authority issued demand orders in 17 cases including in the case of Vodafone and Cairn Group. Further Finance Act 2012, provided that any demand order/notice etc. issued under the ITA in respect of indirect transfers undertaken prior to the 2012 amendment would continue to be valid. This was done to overcome the SC verdict in the case of Vodafone.
Out of the 17 cases, assessments are still pending in two cases owing to a stay granted by High Court. Furthermore, in four cases arbitration was invoked under the Bilateral Investment Protection Agreements (BIPAs) with United Kingdom and Netherlands. Out of the four arbitration cases, the Arbitration Tribunal has ruled in favor of the taxpayers in two cases viz., in the cases of Vodafone and Cairn.
The move of the GoI to levy retrospective taxes has been hugely criticized on the grounds that it militated against the objective of GoI to provide tax certainty and damaged India’s reputation of an attractive investment destination. The retrospective amendment was considered to be breach of India’s obligation under the BIPAs on the basis that India failed to provide stable, predictable and foreseeable tax regime and retroactive amendments are inimical and fundamental affront to the principles of legal certainty.
In the past few years, GoI has been undertaking major reforms in the financial and Infrastructure sector to create a positive environment for the investors. However, the retrospective amendment and the criticism around such amendment continues to be a sore point for the investors.
Considering the importance and the need to attract foreign investments into India, especially post the economic set back due to COVID-19, GOI has proposed to remove the retrospective effect of the FA 2012 amendment.
In this regard a bill has been passed in the Lok Sabha (the lower house of Indian parliament) titled “The Taxation Laws (Amendment) Bill, 2021” (Bill) on 6 August 2021. The proposals of the Bill are aimed at achieving the following objectives:
- No levy of taxes on indirect transfers undertaken prior to 28 May 2012[4] (specified date)
- No assessment to be made/no enforcement of tax demand/ no notices to be issued in respect of indirect transfers undertaken prior to the specified date
- Nullification of demand orders already raised/assessment made/ penalty levied in respect of indirect transfers undertaken prior to the specified date on fulfilment of specified conditions (viz. withdrawal of pending litigations)
- Refund of taxes collected pursuant to demand order issued in respect of Indirect transfers undertaken prior to the specified date. However, such refund would be without any interest
- Amendment of FA 2012 (which provided for the validity of notices/ orders passed in respect of indirect transfers undertaken prior to the specified date) to provide that such notices/ orders shall cease to apply subject to satisfaction of the specified conditions.
