One of the worst legacies of the UPA government carried forward by the Modi government, the provision for Retrospective Tax, is finally set to be buried. The union finance ministry on Thursday informed the Lok Sabha that it is bringing an amendment to the Income Tax Act, 1961 to this effect. The move comes even as the govt has challenged international arbitration awards against the govt in the Vodafone and Cairn Energy retrospective tax cases.
In a statement issued in the parliament today, the ministry said, “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).”
Moreover, tax demands already made for indirect transfer of Indian assets made before 28th May, 2012 will be nullified under this amendment, subject to fulfilment of certain conditions, such as undertaking that the companies will withdraw all cases or that they will not file any case against the govt of India, and that they will not claim any cost, damage, interest etc.
Accordingly, the draft for the amendment has been prepared, which says that section 9 of the Income Tax Act, 1961 will be amended to ensure that no tax demand shall be raised in future on any income arising out of the sale of assets in India as a result of the transfer of a share or interest in a company or entity registered or incorporated outside India before 28 May 2012.
The amendment also says that if any amount was already paid in respect to such retrospective tax demands, such amounts will be refunded. But no interest under section 244A will be paid on such refunds. However, to get the benefits of these amendments, companies facing retrospective tax demands will have to withdraw all petitions and appeals they may have filed in High Court, Supreme Court, arbitrators etc.
The retrospective amendment was brought in by the UPA govt in 2012 after the Supreme Court of India has ruled that based on the existing laws in the country, the govt had no power to demand tax on gains made on indirect asset transfer in India arising of transactions taking place outside India. In response to this verdict, the govt had introduced the amendment with retrospective effect, which meant it now had the authority to demand such taxes.
The statement issued by the ministry said that this amendment had invited criticism because these were given retrospective effects. The major criticisms were that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination for investment. While several major reforms have been initiated in the financial and infrastructure sector in recent years which has created a positive environment for investment in the country, the retrospective tax provision and the demand made under it remain a sore point with potential investors, the statement said.
Therefore, the government of India decided to bring an amendment to the Income Tax Act to remove the provisions of Retrospective tax demand.