Certainty in tax laws is the cornerstone of any stable and fair tax regime. With rapidly evolving business realities, tax laws need to be dynamic to ensure that a country collects its fair share of the revenue. However, where such an attempt to garner revenue results in a levy of taxes on transactions consummated in the past, it often results in laying the foundation for long drawn litigation as taxpayers battle the onerous burden of such taxes.
The retrospective amendments on indirect share transfer introduced in 2012, in effect, enabled India to tax gains on deals executed after 1 April 1961 involving the transfer of shares of a foreign entity having assets or deriving value from assets in India. As is well reported, this unprecedented move led to widespread apprehension on the possible negative impact on foreign capital inflows and was viewed as a retrograde step for an emerging economy like India.
While the government stood firm on its decision, what followed was a spate of high stakes litigation both in domestic courts and international forums. As per the government’s own data, tax demands were raised on 17 such deals undertaken prior to 2012. As India persisted with these disputes, two arbitral awards were issued under India’s Bilateral Investment treaties, which concluded that the retrospective levy of tax under these amendments violated India’s obligation under bilateral investment treaties to provide fair and equitable treatment to foreign investors. Further to this, enforcement proceedings against India’s assets abroad also commenced.
The need to take measures to address the fallout of the retrospective nature of these amendments was evident several years ago itself. In fact, in September 2012, an Expert Committee under the Chairmanship of Dr Parthasarathy Shome recommended that these amendments should apply prospectively. Similarly, in 2014, the CBDT formed a committee to ensure that these retrospective amendments are enforced only after due diligence. However, despite a change in guard at the Centre, the retrospective amendments continued in the income-tax statute.
But better late than never. The Taxation Laws (Amendment) Act, 2021 (Tax Act) enacted by the Government on August 13, removes the retrospective applicability of these amendments. Accordingly, transactions that have been consummated prior to 28 May 2012 (when Finance Act 2012 was enacted) shall be exempt from indirect transfer tax. Where litigation is pending and tax demands have been paid, the government on the satisfaction of conditions such as withdrawal of pending appeals will refund the taxes already paid without any interest. For ongoing cases, the tax proceedings shall be dropped. In effect, only indirect transfers undertaken post 28 May 2012, will require evaluation from an Indian standpoint.
This Tax Act is a welcome move by the Government and demonstrates the Government’s commitment that it is not in favour of retrospective amendments. With concerted efforts to revamp the tax ecosystem to bring about a fundamental change in how taxpayers are assessed, these proposals, even though delayed, could enhance investor confidence. While the condition of issuance of refunds sans any interest may potentially seem inequitable, the larger intent behind this proposal cannot be faulted.
While it is hoped that this Tax Act shall close the curtains on this decade long saga, it brings with it some key learnings for the future. First, retrospective amendments, especially in tax laws, are undesirable and lead to avoidable litigation. Even if one steps away from the issue of indirect transfers, back in 2001, the law was retrospectively amended from 1 April 1961 to provide that legitimate business expenses would not be tax-deductible where income in relation to such expenses is exempt from tax. While there were no specific provisions that suggested that such expenditure was not deductible, the introduction of such law with retrospective effect led to significant litigation.
Secondly, India needs to relook at the dispute resolution mechanism involving cross-border transactions. With the international tax ecosystem poised for a major reset, it is crucial that alternative dispute resolution mechanisms are in place to ensure that such disputes can be resolved satisfactorily without taxpayers feeling the need to look at international forums for relief. This will not only save undue hardship but would also alleviate concerns of investor protection.
It is not in dispute that the legislature is bestowed with powers to amend laws retrospectively. If a judicial interpretation does not give effect to the true intent of the lawmakers, amendments can and have been proposed. However, in the interest of certainty and to ensure that the faith in the dispute resolution process is intact, such amendments should be prospective and be an exception rather than a rule. In the past, tax laws have been amended to nullify judgements given by Courts, which not only directly impact the litigant, but also other taxpayers who have taken positions based on the interpretation of the law by the Courts.
Last but not the least, any substantial change in law, especially impacting non-residents, should be brought in after due consultation. Given India’s treaty obligations, lawmakers should evaluate whether the intended change will lead to desired outcomes or would only result in further ambiguity.
While these are early days, recent news reports of impacted taxpayers looking at this Tax Act is a welcome sign that it is time to bury the past as India and the world look at a new international tax order.
The article is authored by Naveen Aggarwal, Partner, Tax, KPMG in India. The views expressed are personal