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The Taxation Laws (Amendment) Bill, 2021 offers to drop tax claims against companies on deals before May 2012 that involve indirect transfer of Indian assets on fulfilment of specified conditions including the withdrawal of pending litigation and the assurance that no claim for damages would be filed.

The Bill:

  • The Taxation Laws (Amendment) Bill, 2021 amends the Income Tax Act, 1961 (IT Act) and the Finance Act, 2012.
  • The 2012 Act had amended the IT Act to impose tax liability on the income earned from the sale of shares of a foreign company on a retrospective basis (i.e., also applicable to the transactions done before May 28, 2012).  The Bill proposes to nullify this retrospective basis for taxation.  Key features of the Bill include:
  • Tax on income earned from the sale of shares outside India: Under the IT Act, non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India.
  • The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.
  • As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale.
  • The Bill proposes to nullify this tax liability imposed on such persons provided they fulfil certain conditions.  These conditions are:
    • if the person has filed an appeal or petition in this regard, it must be withdrawn or the person must submit an undertaking to withdraw it
    • if the person has initiated or given notice for any arbitration, conciliation, or mediation proceedings in this regard, the notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them
    • the person must submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement.
  • The Bill provides that if a concerned person fulfils the above conditions, all assessment or reassessment orders issued in relation to such tax liability will be deemed to have never been issued.
  • Further, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.

Retrospective taxation:

  • 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.
  • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
  • Retrospective Taxation hurts companies that had knowingly or unknowingly interpreted the tax rules differently.


  • The retrospective tax law was introduced through the Finance Act, 2012 after Vodafone won a case in the Supreme Court against the I-T department’s demand of ₹11,000 crore in tax dues.
  • This law became necessary after the Supreme Court, in 2012, ruled that gains arising from indirect transfer of Indian assets were not taxable under existing laws.
  • The retrospective tax provisions were also applied to Cairn, when it was exiting from Cairn India Ltd in January 2014. The initial demand was for ₹10,570 crore.


  • The move attempts to end long-pending disputes with foreign firms such as Vodafone Plc.
  • The move is also investor-friendly, and also brings to an end messy litigation and arbitration, especially with Cairn, which has seen the company staking claim to India’s overseas assets.

How are global investors likely to react?

  • Even after the Bill becomes law, entities such as Cairn Energy must convince its shareholders and accept the caveats.
  • Prospective investors, however, may take heart from the fact that the government has shown the intent not to claim tax retrospectively and demonstrated a willingness to undo a measure that was seen as hurting the inflow of foreign investment.
  • US-India Strategic and Partnership Forum (USISPF), applauded the Indian move to withdraw the retrospective law relating to tax on indirect transfers.
  • India needs to craft meaningful and clear dispute resolution mechanisms in cross-border transactions to prevent the disputes from going to international courts, and save the cost and time expenditure.

Way forward:

  • Government argued that Taxation Laws (Amendment) Bill introduced will only encourage more international investments into India and is a welcome relief for companies who have long invested in the country.
  • The government has informed Parliament that at least 17 companies will benefit from the move including Cairn Energy Plc and telecom giant Vodafone.
  • Some experts welcomed the move as it will end the spectre of policy uncertainty for potential investors who have seen the Vodafone and Cairn cases unfold over the past decade.
  • The amendments may put an end to arbitration cases from the past“which have created great embarrassment for India in international circles”, while most observers lamented that the issue had been allowed to linger for far too long.
  • This could help restore India’s reputation as a fair and predictable regimeapart from helping put an end to unnecessary, prolonged and expensive litigation.