Retrospective Tax on capital Gain

Our country's economy is at a situation when rapid recovery is required, and foreign investment can play a critical role in this. For speedier economic growth and employment, foreign investment is required. We are all aware of how China has expanded in recent years as a result of foreign investment.

The Government of India, sensing the urgency and apprehension among international investors about Indian tax laws, proposed a Taxation Laws (Amendment) Bill, 2021 to amend the Income-tax Act with the goal of nullifying tax demands with retrospective effect on Thursday (5th August 2021).

Now the question is What is Retrospective Tax and why it has been imposed by India
As per technical meaning, it means giving effect to the amendment in the present law before the date on which the changes were brought in, which results in taxing a transaction that took place prior to the date of formation of the law.

In fact, India enacted a retrospective tax in 2012 to levy a capital gain tax on companies like Cairn and Vodafone Plc. UK. According to this, any capital gain arising from the transfer of shares from a foreign entity with assets in India since 1962 is taxable in India. But after a lot of legal fight between the Government and Vodafone UK, the GOI lost the case and arose many questions among the foreign investors towards India’s tax Laws.

The bill proposed to amend the Income Tax Act,1961 so as to provide that, no tax demand shall be raised in the future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.”

Though there are certain conditions and commitments from the entities, on the basis of which no retrospective tax would be charged by the Government of India on them and below are those:-
• Undertaking from the entities for withdrawal of pending litigations
• Undertaking with a commitment that no claim for cost, damages, interest, etc shall be filled
• The Government would refund the amount which they already took from the entity on retrospective effects basis, without any interest

Effect of Taxation Laws (Amendment) Bill, 2021
After this bill, any demand created before May 28, 2012, will be nullified. Actually, this bill is a win-win for both the companies as well as for the Government. This step would bring a lot of certainty and confidence among the investors. Investors used to think about it multiple times before investing in India by considering the retrospective step, now it is going to end that insecurity and will settle down a lot of litigation and unnecessary disputes.

At the time of the introduction of retrospective taxation in 2012, a number of countries were opposed to India's decision, viewing the provision as a violation of a tax treaty. This bill will now assist India in regaining its international reputation, attracting investors, and reviving the Indian economy.