EconomyGeneral Studies III

Taxation Laws (Amendment) Bill 2021 (Retrospective tax policy)


The Union government finally withdrew the Income-tax Act and Finance Act, 2012 by introducing an amendment bill.


The IT Act and finance act 2012 was introduced by then Finance Minister Pranab Mukherjee for retrospective taxing.

What is retrospective tax

A retrospective tax is a tax imposed on a transaction or deal that was conducted in the past. It was introduced in a 2012 amendment to the Finance Act, which enabled imposition of retrospective tax on deals executed after 1962 involving transfer of shares in a foreign entity which had assets in India.

Case related to retrospective tax:

In 2007, Vodafone acquired Hutch for an $11 billion deal through an overseas holding company. (A subsidiary of Vodafone bought Hutchison’s entire stake in CGP investments, which owned 67 per cent of the telecom operator Hutch Essar)

India sent a notice to the UK telecom company saying it should have withheld tax on the purchase and sought Rs 11,218 crore, later added Rs 7,900 crore in penalties.

Vodafone challenged the notice in Supreme Court and subsequently, the judgment favoured the company. The government then, under Pranab Mukherjee as Finance Minister, amended the tax law retrospectively, providing a legal framework for the government’s demand.

A case in the Hague

  • That prompted Cairn UK to move the Permanent Court of Arbitration to The Hague, Netherlands.
  • It said that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it.
  • The treaty provides protection against arbitrary decisions by laying down that India would treat investment from the UK in a “fair and equitable” manner.
  • Vodafone, too, had sought arbitration before the Permanent Court of Arbitration, citing the “fair and equitable” treatment clause in the India-Netherlands BIT.

The Taxation Laws (Amendment) Bill, 2021

The Taxation Laws (Amendment) Bill, 2021 was introduced in Lok Sabha by the Minister of Finance, Ms. Nirmala Sitharaman, on August 5, 2021.  The Bill amends the Income Tax Act, 1961 (IT Act) and the Finance Act, 2012.  The 2012 Act had amended the IT Act to impose tax liability on the income earned from the sale of shares of a foreign company on a retrospective basis (i.e., also applicable to the transactions done before May 28, 2012).  The Bill proposes to nullify this retrospective basis for taxation.  Key features of the Bill include:

  • Tax on income earned from the sale of shares outside India: Under the IT Act, non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India.  The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.  As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale. 
  • The Bill proposes to nullify this tax liability imposed on such persons provided they fulfil certain conditions.  These conditions are:
  • if the person has filed an appeal or petition in this regard, it must be withdrawn or the person must submit an undertaking to withdraw it,
  • if the person has initiated or given notice for any arbitration, conciliation, or mediation proceedings in this regard, the notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them,
  • the person must submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement, and
  • other conditions, as may be prescribed.
  • The Bill provides that if a concerned person fulfils the above conditions, all assessment or reassessment orders issued in relation to such tax liability will be deemed to have never been issued.  Further, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.

Significance of the Bill:

The bill marks a step in the direction of addressing the long-pending demand of foreign investors seeking the removal of retrospective tax for the sake of better tax clarity.

This would help in establishing an investment-friendly business environment, which can increase economic activity and help raise more revenue over time for the government.

This could help restore India’s reputation and improve ease of doing business.

The reversal in stand

  • India has suffered adverse effects of this law on international platform. It lost arbitration case against Cairns energy and was asked to pay back the amount collected.

  • In addition, its reputation as a business friendly economy took a hit when there was no move to reverse the retrospective law.

Way Forward

  • India needs to craft meaningful and clear dispute resolution mechanisms in cross-border transactions to prevent the disputes from going to international courts, and save the cost and time expenditure.
  • Improving the arbitration ecosystem will have a positive impact on the ease of doing busines

Source: Indian Express

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