Amendment in Income tax Act related to Vodafone capital gain case to make it prospective | Govt. remove retrospective amendment

The Apex court of India i.e. The Supreme court of India had pronounced a landmark judgement in case of Vodafone International Holding vs Union of India. Some important points from the judgement are as under:

The tax is levied on the basis of the source and the source is the location where the sale takes and not where the product is derived or purchased from.

HTIL (Hutchison Telecommunications International Ltd) and VIH (Vodafone International Holdings) are foreign companies and the sale takes place outside India, so the source of revenue is outside India. It could be taxable only when this trade is protected by legislation. The tax laws must be strictly construed and tax can be laid only when the language of the statute unambiguously states so. The provision for charging income tax must not be expanded to impose a tax burden which would otherwise be non-taxable. Therefore indirect movement of capital assents cannot be included by expansion of the provision. The present transaction was carried out between two non-resident persons in a contract conducted outside India where the consideration was also rendered outside India and VIH is therefore not legally obligated to respond to the notice referred to in section 163 relating to the purchaser’s care as a representative measure.

The selling of HTIL’s CGP shares to Vodafone or VIH does not amount to transfer of capital assets under the scope of Section 2(14) of the Income Tax Act and therefore not chargeable under capital gains tax on all rights and entitlements resulting from the shareholder agreement, etc., which form an integral part of CGP ‘s shares. The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains tax would amount to imposing capital punishment for capital investment and it lacks authority of law and therefore is quashed.

After the above landmark judgement, Income tax department wanted to save the interest of the country as this could become a machinery to evade tax by indirectly selling the business situated in India and hence an amendment was brought under Income tax Act by way of insertion of explanation 5 to section 9(1)(i) which is as under:

“For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”

Thus, the above amendment or explanation was made applicable retrospectively and hence because of which the Income tax department started to charge tax on the Vodafone group as well and after which they went to International court/ arbitration committee wherein it was held that the amendment cannot be applied retrospectively and it will bring impossibility of event for the taxpayer.

Now, vide THE TAXATION LAWS (AMENDMENT) BILL, 2021 being introduced by the Ministry of Finance in Lok Sabha, the Ministry has tried to rectify it’s mistake and remove the retrospective amendment made to section 9 for bringing capital gain on indirect transfer of shares to tax in India and thus making the amendment prospective in nature.

The memorandum of the above bill read as under:

“Clause 2 of the Bill seeks to amend section 9 of the Income-tax Act, 1961 relating to income deemed to accrue or arise in India. The proposed amendment seeks to insert fourth, fifth and sixth provisos in Explanation 5 to clause (i) of sub-section (1) of the said section alongwith an Explanation which empowers the Board to make rules to provide for (i) the form and manner in which an undertaking shall be submitted; and (ii) any other condition to be fulfilled for the purposes of fifth and sixth provisos.

2. Clause 3 of the Bill seeks to amend section 119 of the Finance Act, 2012 relating to validation of demands, etc. under Income-tax Act, 1961 in certain cases. The proposed amendment seeks to insert first and second provisos to the said section. The first proviso empowers the Board to make rules to provide for (i) the form and manner in which an undertaking shall be submitted; and (ii) any other condition to be fulfilled.

3. The matters in respect of which rules may be made are matters of detail or procedure and as such the delegation of the legislative powers involved is of a normal character.”

The proviso which has been inserted is as under:

“Provided also that nothing contained in this Explanation shall apply to—

(i) an assessment or reassessment to be made under section 143, section 144, section 147 or section 153A or section 153C; or
(ii) an order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154; or
(iii) an order to be passed deeming a person to be an assessee in default under sub-section (1) of section 201,

in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012:“

Thus, according to above proviso if any transaction is done before 28.05.2012 this explanation will not be applicable on that case and thus making the above amendment prospective. Further, if any assessment has already been done then the ministry has also proposed amendment for same according to which all such orders shall be nullified which is as under:

“Provided also that where—

(i) an assessment or reassessment has been made under section 143, section 144, section 147 or section 153A or section 153C; or
(ii) an order has been passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154; or
(iii) an order has been passed deeming a person to be an assessee in default under sub-section (1) of section 201; or
(iv) an order has been passed imposing a penalty under Chapter XXI or under section 221,

in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012 and the person in whose case such assessment or reassessment or order has been passed or made, as the case may be, fulfils the specified conditions, then, such assessment or reassessment or order, to the extent it relates to the said income, shall be deemed never to have been passed or made, as the case may be:

Provided also that where any amount becomes refundable to the person referred to in fifth proviso as a consequence of him fulfilling the specified conditions, then, such amount shall be refunded to him, but no interest under section 244A shall be paid on that amount”

The reason issued by the ministry of Finance to propose this amendment and nullifying the retrospective amendment is as under:

“The said clarificatory amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments. It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination. In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.

The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President)”

Further, various conditions have been proposed in section 119 of the Act after fulfillment of which the benefit of this amendment will be available.

So the above step is a welcoming amendment as this decision was made by earlier government and the present government had promised that no retrospective amendment will be made by this government and this could be considered as government fulfilling it’s promise. However, the present government has also made various retrospective amendment so let’s hope that the present government does not bring any further retrospective amendment under the Income tax act and remove all retrospective amendment done till date.

 

To read the full Bill introduced in Parliament for removing retrospective amendment CLICK HERE.

 

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