Retrospective Amendment in Taxation on Indirect Transfer of Assets in India

Introduction

On 5^th August 2021, the Government has introduced the Taxation Laws (Amendment) Bill 2021 in which the amendment has been proposed to amend the Income tax act 1961 regarding the provisions related to taxation on indirect transfer of Indian Assets if the transactions was undertaken before 28^th May 2012 i.e. the date on which the Finance Bill 2012 received the assent of the President. The proposed amendment is to be seen as a vital step towards increasing the Investor’s inflow of funds into the Country development ecosystem as well as saving the Country image which has been affected badly by the decisions at International arbitrational Courts.

Background of the Case

Vodafone International Holding (Vodafone) and Hutchison Telecommunication International Limited (HTIL) entered into a transaction in which the HTIL transferred the share capital of its Cayman Island based subsidiary company to Vodafone . As a result of which, Vodafone indirectly acquired a controlling interest in Hutchison Essar Limited (HEL), an Indian Joint Venture company, in 2006.

In 2007, the Income tax department served a notice to Vodafone, on its failure to pay the withholding tax to be deducted from the consideration paid to HTIL. When the matter went to the High Court, the case was decided in the favour of the Income tax department. In Supreme Court, the case was decided in the favour of Vodafone stating that as gains arising from indirect transfer of Indian asset was not chargeable to tax in India.

In the Finance Bill 2012, the Government introduced significant changes in Section 9 i.e. retrospectively changing the section 9 making the indirect transfer of the underlying assets to be taxable. To give effect to this, explanation 4 and 5 had been introduced with the validation clause that it shall operate notwithstanding anything contained in any decree or order of court or tribunal or any authority.

Due to these retrospective changes in the section 9, it has attracted the criticism from the stakeholders. The said retrospective amendment attracted demand on 17 cases.

Being not satisfied with the Indian Government’s approach, the two companies namely Vodafone and Cairn approached International Arbitration Tribunal. It was, then, held that India’s imposition of tax liability, penalties or interest on Vodafone were in breach of an investment treaty between India and the Netherlands. Due to this, the Indian Government is directed to pay the British Firm over Rs. 7,000 crore. Hence, it was, rightly, appreciated by the the Government that the above are damaging reputation of India.

Amendment Proposed by Taxation Laws (Amendment) Bill, 2021

In view of the above arbitration, Taxation Laws (Amendment) Bill was introduced in Lok Sabha on 5^th August,2021 and was also passed the very net day. The Bill will only benefit the foreign companies who either receive adverse orders or against whom any proceeding was initiated due an amendment in 2012.

The Bill, 2021 proposes to provide that no demand shall be raised in future for any indirect transfer of  Indian Assets made before 28^th May, 2012. The cut off date, i.e. 28^th May, 2012 is the date on which the Finance Bill, 2012 received the President assent. The Bill further provides that any pending demand in case of indirect transfer of Indian asset will be nullified on fulfilment of specified conditions. In this regard, three provisos have been introduced to Explanation 5 to Section 9(1)(i) of the Income Tax Act, 1961.

Conclusion

Thus, to grow back the trust of the Foreign Investors in India, an appreciative step is taken by the Indian Government by nullifying all the demands raised in respect of Indirect transfer of an Indian Asset by amending Section 9(1)(i) of the Income Tax Act, 1961 by introducing three new provisos to Explanation 5 which deals with the Indirect transfer of an Indian Asset. This amendment will go a long way in gaining back the trust of foreign investors.