Taxation Laws (Amendment) Bill, 2021 has been introduced in the Lok Sabha withdrawing the retrospectivity to the amendment brought about vide Finance Act 2012, which clarified that gains arising from sale of shares of a foreign company were always taxable in India if such shares, directly or indirectly, derive its value substantially from assets located in India.

Background

• The issue of taxation of ‘indirect transfer’ has been a matter prone to long-drawn litigation in India. In 2012, while the Supreme Court ruled in favour of the taxpayers, the government found the judgement to be against legislative intent. Consequently, a retrospective amendment was brought about vide Finance Act 2012, to ‘clarify’ that gains arising from sale of shares of a foreign company shall be taxable in India if such shares, directly or indirectly, derive its value substantially from assets located in India. Provisions were also introduced for validation of demand for cases relating to indirect transfer of Indian assets.
• The retrospectivity to the clarificatory amendment, met widespread disapproval from stakeholders, who contended that such amendments go against the principle of tax certainty and are detrimental to India’s image as a taxpayer/ investor friendly nation.
• The matter was also deliberated upon by the Arbitration Tribunal under Bilateral Investment Protection Treaty, and was decided against the Indian government in the case of Vodafone and Cairn.
• The Taxation Laws (Amendment) Bill, 2021 has now been introduced in the Lok Sabha withdrawing the retrospectivity to the amendment brought about vide Finance Act 2012.