Prelimsverse: Indian Government withdraws retrospective tax law on “Indirect Transfers” 

The Finance Minister introduced The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha that seeks to withdraw tax demands made using a 2012 retrospective legislation to tax the indirect transfer of Indian assets.
The scrapping of the retrospective levy provides clarity to investors by removing a major source of ambiguity on taxation laws.

What is Indirect Transfers with reference to India?

The law defines income from indirect transfers as income accruing or arising through or from the transfer of an asset or capital asset situated in India as a result of the transfer of shares or interests in a company or entity registered or incorporated outside of India.

Case study of Indirect Transfer and retrospective taxation: 

In 2007, the Vodafone Group bought a Cayman Islands-based company which indirectly held a majority stake in Indian firm Hutchison Essar Ltd. For this, the Indian government for the first time raised a demand for capital gains and withholding tax from Vodafone, under the Income Tax Act of 1961. Following this, the Supreme Court in 2012, ruled in favour of Vodafone.

Later, the Finance Act was amended in 2012 giving the Income Tax Department the power to retrospectively tax in such deals. Vodafone then initiated arbitration in 2014 invoking the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.In 2020, the Permanent Court of Arbitration (PCA) at the Hague (Netherlands) ruled that India’s retrospective imposition of a tax liability was a violation of the BIT with Netherlands and the arbitration rules of UNCITRAL.

What do you mean by Retrospective Taxation?

1. It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
2. Imposing retrospective tax has created a black mark on a country’s reputation as a predictable investment destination.

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