Explained –What Is Retrospective Tax and how does it affect investors?

New Delhi: The government on Thursday brought in The Taxation Laws (Amendment) Bill, 2021 in Lok Sabha to withdraw the Retrospective law relating to tax on indirect transfers. The Bill introduced by the Finance Ministry is aimed at encouraging more international investments into India and is touted as a welcome relief for companies who have long invested in the country.

What Is Retrospective Tax and how does it affect investors?

The retrospective tax was introduced in 2012 by late former president and then Finance Minister Pranab Mukherjee. Retrospective Tax enabled the government to collect tax from earlier years even though they were not taxable at the time.

Mukherjee had made amendments in the Finance Act 2012, to make changes in various provisions of the Income Tax Act, 1961 with retrospective effect. It contained provisions intended to tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets.

Retrospective Tax slapped on various companies in India

Cases such as Vodafone's transaction with Hutchison in 2007 or the internal reorganisation of the India business that Cairn Energy did in 2006-07 before listing it on local bourses came under the purview of Retrospective Tax.

The same law was used by tax authorities in January 2013 to slap Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest. This was in February 2016 updated to Rs 22,100 crore plus interest. They slapped an assessment of Rs 10,247 crore on Cairn Energy in January 2014, which after including penalities came to Rs 20,495 crore.

A similar demand was also slapped on Vedanta Ltd, which bought Cairn's India business in 2011.

Taxation Laws (Amendment) Bill, 2021

The Taxation Laws Amendment Bill introduced by Finance Minister Nirmala Sitharaman seeks to do away with the contentious retrospective tax provision, will impact retro tax cases of Cairn Energy and Vodafone.

The Taxation Laws (Amendment) Bill, 2021 was introduced by the Finance Minister in Lok Sabha on August 5. The Bill proposes to amend the Income Tax Act, 1961 to provide that no tax demand shall be raised in future on the basis of the retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.

The Finance Bill, 2012 had received the assent of the President on this day. The new bill proposes that the demand raised for indirect transfer of Indian assets made before May 28, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest shall be filed.

"The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May 2012 (i.E., the date on which the Finance Bill, 2012 received the assent of the President)," it said.

With Agency Inputs