The Central Government’s Ministry of Finance introduced the Taxation Laws (Amendment) Bill, 2021, which aimed at nullifying the effect of amendment brought in by the Finance Act, 2012.
The 2012 amendment retrospectively imposed tax liability on the gains which arose from indirect transfer of Indian assets. It had been passed to overturn the apex court’s judgment in the Vodafone case which did not allow the retrospective tax liability.
Upon the introduction of Finance Act, 2012, the underlying provisions of Income Tax Act, 1961, were amended so as to bring the gains arising from sale of share belonging to a foreign company, within the Indian tax liability bounds, if such share derived its value substantially from the assets located in India, whether directly or indirectly.
Further, it provided for validation of demand. The 2012 amendment attracted widespread criticism on the ground that retrospective effect went against the principle of tax certainty. It continued to act as a sore point with respect to potential investors, said the Ministry.
The 2021 amendment has proposed to amend the Income Tax Act to the extent that its effect would be prospective in nature. The amendment assures that no tax demand would be raised in future on the basis of “retrospective” nature for any indirect transfer of Indian assets transacted before May 28, 2012.
Moreover, the amendment proposed to refund the amount paid in certain cases, falling under the stripped off retrospective nature of transactions.
The Ministry of Finance stated that at present, India stands at a juncture where quick recovery from the after-effects of COVID-19 is the need of the hour and foreign investment would help in playing an important role in promoting economic growth and employment.
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