The federal government has lastly determined to bury the notorious retrospective modification to the Earnings Tax Act

Nine years after it was incorporated into the law books and seven years after the ruling Bharatiya Janata Party pledged to get rid of it in parliament, the government finally had the brains to abolish the notorious retrospective amendment to the income tax law. The Taxation Laws (Amendment) Bill 2021, passed by the Lok Sabha on Friday, amends the Income Tax Act 1961 and the Finance Act 2012 to essentially remove the latitude for retroactive tax claims by the authorities.

According to the new law, based on the aforementioned retrospective amendment, no tax claim will be levied in the future for the indirect transfer of Indian assets if the transaction was carried out before 28th 2012, received the formal approval of the Indian President and became law). As Finance Minister Nirmala Sitharaman noted in parliament during a debate on the bill, the 2012 law, introduced by then Finance Minister Pranab Mukherjee, was “illegal and bad for investor sentiment”.

The finance minister also admitted that there had been up to 17 legal disputes due to the tax deduction act, which were initiated after the tax office in the Vodafone case at the Supreme Court lost the tax claim for an indirect asset transfer. The Supreme Court ruled in 2012 that the tax may not be levied on the indirect transfer of shares in foreign companies.

The tax claim on the “indirect transfer” of assets – where the transaction takes place outside of Indian tax jurisdiction but covers underlying assets in India – has been thoroughly debated in Indian courts – where even the Supreme Court has done so in favor of taxpayers and against Government – as well as several international appeal forums in which the government also failed to take a stand.

The retroactive effect of the clarifying change – the law was changed in 2012 with effect from 1961 – has been widely condemned by all stakeholders, especially foreign investors, who have rightly accused that such changes violate the principle of tax security and India. damage image as an investor-friendly nation. India’s stubborn refusal to adhere to various bilateral investment treaties has also further damaged its hard-won reputation as a nation with the rule of law and due process with sufficient institutional protections to contain the exaggeration or whims of the executive.

What is still inexplicable is why it took the government – particularly that of the BJP, which criticized the retrospective change in the opposition as synonymous with “tax terrorism” – so many years and so many humiliating defeats in courts and arbitration forums to make sense . The bill passed includes a clause to return the money seized from the litigants – Vodafone PLC and Cairn Energy – without interest, an offer these companies may not accept given the magnitude of the damage and financial loss over the years.

A close reading of the draft law also leads to the conclusion that the government has not fundamentally changed its mind with regard to such retrospective demands, but that these specific demands made by the 2012 amendment are no longer upheld. This does not end the uncertainty for international investors, as the finance minister claimed in parliament.

As the Union’s finance minister TV Somanathan said, India “only decides” to end the dispute and not to give up its “right to taxes”. Indeed, this “right to tax” argument, which has been the lynchpin of the government’s defense in multiple courts, has not been challenged by petitioners, courts or arbitration tribunals. You have all pointed out time and again that a retrospective change in the law that effectively converted a legal and tax-compliant transaction into an illegal one a year later was inherently illegal and untenable.

It is clear from the wording of the law and the following declaration that the government is dropping the controversial amendment after it has lost all possible legal remedies and with the threat of global humiliation through the confiscation of their assets abroad by litigants seeking their awards. That’s a shame. One would have thought that the government would have been doing a real soul search to see how they respond to negative judgments and awards. The default option was to appeal any negative decision.

From 2018-19, there were over 4.8 lakh tax cases pending in the courts, many for very small amounts where litigation costs far exceeded any potential income. Political leadership – the BJP was no different from Congress in this regard – tended to blindly follow the advice of bureaucrats without focusing on the major reputational damage and potential investment losses from such litigation. It is time to hold officials accountable.