Government to abolish retrospective tax, introduce bill to withdraw tax demand on Cairn and Vodafone

New Delhi. The government on Thursday introduced a bill in the Lok Sabha to allay fears among companies regarding retro tax, a retrospective tax law. Under this, the tax demand from companies like Cairn Energy and Vodafone will be withdrawn from the earlier date. The government also said that it would refund the money collected through such tax. Finance Minister Nirmala Sitharaman introduced the ‘Taxation Laws (Amendment) Bill, 2021’ in Lok Sabha amidst uproar by opposition members. Under this, the demands made using the retrospective Tax Act, 2012 to levy tax on indirect transfer of Indian assets will be withdrawn.

“It is also proposed to refund the amount paid in these cases without any interest,” the bill said. on disputes. The Government of India has lost in arbitration lawsuits filed by these two companies against retrospective tax law. Although the government has no liability in the Vodafone case, it has to return US$1.2 billion to Cairn Energy. Opposition members in the lower house were creating a ruckus on various issues, including the Pegasus espionage case.

Finance Minister Nirmala Sitharaman introduced this bill amid the uproar. The Bill stated that the issue of taxation on gains arising in the event of transfer of assets situated in India by way of transfer of shares (indirect transfer of Indian assets) of a foreign company was a subject of protracted litigation. In 2012, the Supreme Court ruled that gains from indirect transfer of Indian assets are not taxable under the existing provisions of the law. Subsequently, the Government vide the Finance Act, 2012, retrospectively amended the provisions of the Income-tax Act, 1961 to make it clear that profits from the sale of shares of a foreign company would be taxable in India.

The objectives of the bill states, “According to this law, income tax was demanded in 17 cases. In two cases, assessments are pending due to adjournment by the High Court.” Arbitration was invoked in four of these 17 cases under the bilateral Investment Protection Treaty with Britain and the Netherlands. With reference to the arbitration orders won by Cairn and Vodafone, it said, “In two cases, the arbitration tribunal has ruled in favor of the taxpayer and against the Income Tax Department.”

“The said clarification amendments made by the Finance Act, 2012 invited criticism from stakeholders regarding retrospective taxation. It is argued that such retrospective amendments are against the principle of tax certainty and harm India’s reputation as an attractive destination.” A number of major reforms have been undertaken in the financial and infrastructure sector to create a positive investment climate, but “the clarification amendments from the retrospective date and the demand for it in some cases remains a serious issue among investors.” Foreign investment has an important role to play in the rapid recovery of the economy and promotion of employment after the -19 pandemic. The Bill states that no retrospective taxation demand shall be made in future for any indirect transfer of Indian property if the transaction is made before May 28, 2012. It is also proposed to refund the amount paid in these cases without any interest and all pending litigation in this regard will be withdrawn, though no claim can be filed for cost, damages, interest etc.

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