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The Taxation Laws (Amendment) Bill, 2021

The Taxation Laws (Amendment) Bill, 2021 was passed by the Rajya Sabha on 9th August 2021, and awaits the President’s assent. The Bill amends the Income Tax Act, 1961 and the Finance Act, 2012, to nullify the retrospective basis for taxation.

The Finance Act had earlier amended the Income Tax Act to impose retrospective tax liability on foreign companies for income earned from the sale of shares. The amendment provided that the shares of a company registered or incorporated outside India would be deemed to have been situated in India if they substantially derive their value from the assets located in India. Therefore, such shares sold prior to 28th May, 2012 (i.e., the date of enactment of the Act) would create an income tax liability.

Under the Bill, retrospective tax liability would be nullified under the following conditions:

  1. A person who has filed a petition or appeal against such taxation must withdraw or undertake to withdraw such petition or appeal.

  2. Any claims or notices under arbitration, conciliation, or mediation proceedings regarding retrospective taxation must be withdrawn, or an undertaking must be given that such notices or claims will be withdrawn, meaning companies will be unable to seek costs, damages, or interest.

  3. An undertaking must be given, waiving the right to seek or pursue any remedy or claim regarding retrospective taxes, which would otherwise be available under any law in force or any bilateral agreement.

  4. Upon fulfilling other conditions as may be prescribed.

Upon fulfilment of the above conditions, assessment or reassessment orders issued regarding such retrospective tax liabilities will be deemed to have never been issued. Additionally, if a person becomes eligible for a refund thereafter, the amount will be refunded without interest.

In instances where interested parties such as direct or indirect shareholders, or any other beneficial owner of the taxpayer in relation to whom the proceedings are ongoing brings a claim against the government or its affiliates after the undertaking has been filed, the taxpayer is required to indemnify and defend the government and its affiliates.

The government will give companies 45 days to withdraw all claims and seek a settlement of retrospective tax disputes after the final rules have been notified. The draft rules on the subject were issued on 28th August, 2021. Once claims have been withdrawn, the tax office has been given 15 days to accept or reject applications for nullification and refund. The Centre aims to conclude a majority of the cases within three to five months.

The amendment brings to a conclusion 17 disputes with companies including Vodafone and Cairn Energy. The Centre had demanded INR 22,100 crore from Vodafone in retrospective tax, back taxes, penalties and interest, and was seeking over INR 30,700 crore from Cairn in penalties for its failure to pay INR 10,247 crore capital gains tax on time.

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