The Taxation Laws (Amendment) Bill, 2021

INDEX

REFERENCE WITH UPSC-CSE SYLLABUS

• WHY IN NEWS
• BACKGROUND
• PROPOSED CHANGES IN THE BILL
• WHAT IS A RETROSPECTIVE TAXATION?
• TIMELINE OF EVENTS
• ARGUMENT IN FAVOUR OF RETROSPECTIVE TAXATION
• ARGUMENT AGAINST RETROSPECTIVE TAXATION
• CONCLUSION
• EXPECTED PRELIMS QUESTIONS

EXPECTED MAINS QUESTIONS 

ADDITIONAL POINTS FOR BETTER CLARITY

1. VODAFONE CASE
2. CAIRN ENERGY CASE
3. CAPITAL GAINS TAX

REFERENCE WITH UPSC-CSE SYLLABUS

• General Studies-III
• Economy, Government Budgeting, Taxation.

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WHY IN NEWS

• The Taxation Laws (Amendment) Bill, 2021 in Lok Sabha has been introduced by the government.
• The Income-tax Act, 1961 and the Finance Act, 2012, are amended by it.
• Under the retrospective law brought in 2012, on companies like Cairn Energy and Vodafone, etc., the Indian government proposed to withdraw all tax demands and will refund the money collected to enforce such levies. 

BACKGROUND

• The retrospective taxation power was introduced by the former Finance Minister, the late Pranab Mukherjee after the Supreme Court held that Vodafone could not be taxed for a 2007 transaction involving its purchase of a 67% stake in Hutchison Whampoa for $11 billion.

PROPOSED CHANGES IN THE BILL

• The Bill proposes to amend the Income Tax Act 1961 and the Finance Act, 2012.
• Before May 2012 if any tax demand is made on transactions then it shall be dropped, and if any taxes already collected shall be repaid, albeit without interest. 
• All pending cases against the government have to be dropped by the concerned taxpayers to be eligible.
• Taxpayers have to promise not to make any demands for damages or costs.
• Only of the principal amount, not the interest, the Bill allows for the refund.

WHAT IS A RETROSPECTIVE TAXATION?

• From a time behind the date on which the law is passed it allows a country to pass a rule on taxing certain products, items, or services, and deals and charge companies.
• To correct any anomalies in their taxation policies countries use this route.
• Many countries including India, the USA, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.
• Around Rs 8,100 crore collected by government in taxes under the existing law, out of which Rs 7,800 crore from Cairn Energy alone.

TIMELINE OF EVENTS

• May 2007: For 11 billion dollars. Hutchison Whampoa's controlling stake in Hutchison Essar brought by Vodafone.
• Sept 2007: Citing alleged failure to deduct withholding tax from Hutchison Telecommunications International Ltd the IT Department serves notice to Vodafone International Holdings BV. The UK firm later moves to Bombay High Court.
• Sept 2010: Stating it has jurisdiction over the deal the Bombay High Court rules in favor of the l-T Department. Vodafone challenges the ruling in the Supreme Court 
• Jan 2012: Saying the transaction is not taxable In India and hence the company is not responsible for deduction of withholding tax the Supreme Court rules In favor of Vodafone,
• April 2012:, Issue raised with then Finance Minister, Pranab Mukherjee by George Osborne, UK's Chancellor of the Exchequer.
• April 2014: Vodafone Group moves the Permanent Court of Arbitration in The Hague 
• Sept 25, 2020: The arbitration tribunal ruled in favor of Vodafone in a 20,000 crore tax case
• The equitable and fair treatment standard under the bilateral investment treaty was violated the Hague court said in favor of Vodafone.
• Later in a similar manner tax claims were also raised on Cairn Energy.

ARGUMENT IN FAVOUR OF RETROSPECTIVE TAXATION

• India’s sovereign right to taxation cannot be questioned overseas as claim by the government

ARGUMENT AGAINST RETROSPECTIVE TAXATION

• It will only scare investors away
• Foreign investors are discouraged from coming to India and that the Centre should look to resolve the case at the earliest.
• Tax terrorism, The National Democratic Alliance (NDA), which was in the Opposition earlier has termed this.

CONCLUSION

• After facing multiple setbacks in international arbitrations government has finally done the right thing.
• It will have a positive impact on the ease of doing business.
• For a healthy investment climate, the amendment was needed.
• For promoting economic growth and development foreign investment is going to be very crucial in the coming times so it is a welcome move from the government and it will send a positive message to all the investors.

EXPECTED PRELIMS QUESTIONS

Q1. Consider the following statement regarding RETROSPECTIVE TAXATION

(a) From a time behind the date on which the law is passed it allows a country to pass a rule on taxing certain products, items, or services, and deals and charge companies.

(b) To correct any anomalies in their taxation policies countries use this route.

Which of the following statement is correct?

(1) a only

(2) b only 

(3) Both a and b

(4) Neither a nor b

SOLUTION C

STATEMENT A is correct because from a time behind the date on which the law is passed it allows a country to pass a rule on taxing certain products, items, or services, and deals and charge companies.

STATEMENT B is correct because of correct any anomalies in their taxation policies countries use this route.

 

Q2. Consider the following statement:

(a) Finance Bill is a Money Bill according to Article 110 of the Constitution of India.

(b) Income that derives from the sale or exchange of an asset, such as a stock or property that's categorized as a capital asset for that capital gains tax is paid.

Which of the following statement is correct?

(1) a only

(2) b only 

(3) Both a and b

(4) Neither a nor b

SOLUTION C

STATEMENT A is correct because Article 110 of the Constitution of India says Finance Bill is a Money Bill.

STATEMENT B is correct because Income that derives from the sale or exchange of an asset, such as a stock or property that's categorized as a capital asset for that capital gains tax is paid.

 

Q3. Consider the following statement regarding The Taxation Laws (Amendment) Bill, 2021

(a) Before 2010 if any tax demand is made on transactions then it shall be dropped, and if any taxes already collected shall be repaid, albeit without interest. 

(b) All pending cases against the government have to be dropped by the concerned taxpayers to be eligible.

Which of the following statement is incorrect?

(1) a only

(2) b only 

(3) Both a and b

(4) Neither a nor b

SOLUTION A

STATEMENT A is incorrect because Before May 2012 if any tax demand is made on transactions then it shall be dropped, and if any taxes already collected shall be repaid, albeit without interest. 

STATEMENT B is correct because all pending cases against the government have to be dropped by the concerned taxpayers to be eligible.

 

EXPECTED MAINS QUESTIONS

Q1. Discuss the rationale behind the recent Taxation Laws (Amendment) Bill, 2021, and account for its key features.

 

ADDITIONAL POINTS FOR BETTER CLARITY

VODAFONE CASE

Vodafone had bought a 67% stake in Hutchison Whampoa for $11 billion in May 2007.

This included the mobile telephony business and other assets of Hutchison in India. 

For capital gains in September that year, the Indian government for the first time raised a demand of Rs 7,990 crore and withholding tax from Vodafone, saying the company the tax at source should have deducted before making a payment to Hutchison.

The demand notice was challenged in the Bombay High Court Vodafone, which ruled in favor of the Income Tax Department. 

In the Supreme Court Vodafone challenged the High Court judgment which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.

Then the Finance Minister, the late Pranab Mukherjee, the same year, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals. 

The case had by then become infamous as the ‘retrospective taxation case’.

The Act was passed by Parliament that year and the onus to pay the taxes fell back on Vodafone.

CAIRN ENERGY CASE

Similar to what Vodafone did for a breach relating to India’s 2012 retrospective amendments to tax laws the arbitration was initiated by Cairn, 

Under a holding company —Cairn India Limited in 2006, Cairn Energy made a bid to consolidate its Indian assets.

Cairn UK transferred shares of Cairn India Holdings to Cairn India, essentially transferring shares in non-Indian companies to an Indian holding company as part of that internal rearrangement, 

Roughly 30 percent of its shares through an Initial Public Offering Cairn India then divested 

Between 2009 and 2011, most of Cairn Energy was acquired by mining conglomerate Vedanta Plc acquired but Cairn UK was not allowed to transfer its 9.8 percent stake in Cairn India to Vedanta. 

The share transfers attracted capital gains tax of over Rs 6,000 crore by Cairn UK tax authorities in India said in the 2006 transactions.

It was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from the UK in a “fair and equitable manner” this retrospective taxation, Cairn argued.

Cairn launched recovery proceedings across countries as part of which a French court ordered the freezing of some Indian assets in Paris after India refused to pay the compensation,

CAPITAL GAINS TAX

Income that derives from the sale or exchange of an asset, such as a stock or property that's categorized as a capital asset for that this tax is paid.

Sources used:

The Hindu,The Indian Express, British Broadcasting Corporation News, Press Trust of India, Business Standard, The Economic Times