Tax certainty is the cornerstone of a stable and fair tax system. Given the rapidly evolving business realities, tax laws need to be dynamic to ensure that a country gets its fair share of revenues. However, when such an attempt to generate revenue results in tax being levied on past transactions, it often results in the laying of the foundation for lengthy litigation as taxpayers struggle against the heavy burden of such taxes.
The retrospective changes to indirect transfer of shares introduced in 2012 allowed India to tax gains on transactions made after the 1st As well reported, this unprecedented move sparked widespread concern about the potential negative impact on foreign capital inflows and was considered a Considered a step backwards for an emerging economy like India.
While the government stuck to its decision, a spate of high-stakes litigation ensued in both national courts and international forums. According to the government, 17 such transactions concluded before 2012 were subject to tax claims. As India continued these disputes, two arbitration awards were made under India’s bilateral investment treaty, which concluded that the retroactive tax collection under these amendments violated India’s bilateral investment treaty obligation to treat foreign investors fairly and fairly. In addition, enforcement proceedings have been initiated against India’s assets abroad.
The need to take action to address the effects of the retrospective nature of these changes was evident several years ago. In fact, in September 2012, a committee of experts chaired by Dr. Parthasarathy Shome to apply these amendments prospectively. The CBDT also formed a committee in 2014 to ensure that these retrospective changes are only enforced with due diligence. However, despite a change of guard at the center, the retrospective changes to the Income Tax Act continued.
But better late than never. The Taxation Laws (Amendment) Act 2021 (Tax Act), enacted by the government on August 13th, removes the retrospective application of these amendments. Accordingly, transactions made prior to May 28, 2012 (when the 2012 Finance Act) are exempt from indirect transfer tax. If a lawsuit is pending and tax claims have been paid, the government will refund the taxes already paid interest-free, subject to conditions such as withdrawing pending appeals. The tax procedure will be discontinued for ongoing cases. In fact, only indirect transfers made after May 28, 2012 need to be assessed from an Indian perspective.
This tax bill is a welcome move by the government and shows the government’s commitment not to advocate retrospective changes. With a concerted effort to reshape the tax ecosystem to fundamentally change the way taxpayers are valued, these proposals, albeit delayed, could increase investor confidence. While the condition for refunds without interest may seem unfair, the overall intent of this proposal cannot be criticized.
While it is hoped that this tax bill will close the curtain on this decades-long saga, it does bring some important lessons for the future. First, retrospective changes, especially in tax law, are undesirable and lead to avoidable legal disputes. Even if one refrains from the question of indirect transfers, the law was amended in 2001 with retroactive effect from April 1, 1961 to the effect that legitimate business expenses are not tax-deductible if income from these expenses is tax-exempt. While there were no specific provisions to suggest that such expenses were not deductible, the introduction of such a law with retroactive effect resulted in significant litigation.
Second, India needs to rethink the dispute settlement mechanism related to cross-border transactions. With the international tax ecosystem facing a major reboot, it is vital that alternative dispute resolution mechanisms are in place to ensure that such disputes can be satisfactorily resolved without taxpayers feeling the need to seek help from international forums. This not only saves undue hardship, but would also reduce concerns about investor protection.
It is undisputed that the legislature is granted powers to subsequently amend laws. If a judicial interpretation does not correspond to the true will of the legislature, changes can and have been proposed. However, in the interests of certainty and to ensure that confidence in the dispute settlement process is maintained, such changes should be prospective and should be an exception rather than a rule. In the past, tax laws have been amended to overturn judgments by courts that directly affect not only those involved in the litigation, but also other taxpayers who have taken positions based on the courts’ interpretation of the law.
Last but not least, every significant change in the law that affects non-residents in particular should be introduced after appropriate advice. In view of India’s contractual obligations, the legislator should examine whether the proposed change will produce the desired results or would only lead to further ambiguities.
While it’s just getting started, the recent news reports of concerned taxpayers looking at this tax bill are a welcome sign that it is time to bury the past as India and the world look to a new international tax regime.
The article was written by Naveen Aggarwal, Partner, Tax, KPMG in India. The views expressed are personal