The Upper House of India’s Parliament (Rajya Sabha) on Monday passed the Tax Law Amendment Act (“Tax Law”) aimed at ending all retrospective taxes on indirect capital transfers in India.
Specifically, the purpose of the Tax Act is to repeal the effects of the amendments to the Finance Act of 2012 that sought to retroactively tax gains from indirect transfers of assets based in India.
Any bill “imposing, abolishing, issuing, amending or regulating taxes” is considered a monetary bill under Article 110 of India’s Constitution. Since the tax bill falls under the definition of a “bank note”, Article 109 of the constitution only authorizes Rajya Sabha to approve the tax bill with recommendations to the House of Commons (Lok Sabha).
In other words, Rajya Sabha has no power to reject the tax bill and even if he had not approved the tax bill within 14 days, the bill would have been approved by both houses of parliament.
It is now up to the Lok Sabha to agree and accept recommendations on the Rajya Sabha Tax Law, but they can pass the law without accepting any of the recommendations. Therefore, Rajya Sabha has very limited powers in cases of taxation or tax laws.
The Tax Act would amend the Income Tax Act so that the effects of the Finance Act would be prospective, remove certain conditions for indirect transfers of assets based in India before May 28, 2012, and propose various other changes to the Finance Act.
The Finance Act was an attempt to circumvent the Supreme Court’s ruling in the Vodafone case that profits from indirect asset transfers were not taxable in India under the then-current provisions of the Income Tax Act.
The tax law would de facto end all tax claims on companies such as Cairn Energy and Vodafone due to the retrospective provision in the finance law. The bill has yet to be approved by Lok Sabha, who may or may not accept recommendations from Rajya Sabha.
The tax bill was passed amid protests and work stoppages from opposition parties, including the Indian National Congress Party, who complained that there was insufficient time for a thoughtful discussion of the proposed bill. However, some commentators welcomed the bill that retroactive taxation has created uncertainty and is not being respected by international arbitration tribunals.