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Taxation Laws Bill, 2021

Taxation Laws Bill, 2021

INTRODUCTION:

The Government of every nation requires funds to implement and carry out its necessary duties and functions to promote the welfare of its people and develop its economy. This can happen only if the Government generates revenue. Moreover, this can be done by making the citizens contribute towards them by way of tax.

Tax is a compulsory contribution made by the people to the government in exchange of welfare. The following are the objects of taxation [1]https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-taxation-discussed/17450:

a. Primary source of revenue to the Government
b. Increase demand and supply
c. Regulate imports and exports
d. Price stability
e. Accelerate economic development

To implement this process, the government requires a proper taxation structure. Moreover, the foundation of a proper tax structure lies in its policies and legislations.

TAX STRUCTURE IN INDIA AND LEGISLATIONS PERTAINING TO TAXATION:

In India, Taxes are divided into 2 major categories:

a. Direct Taxes
b. Indirect Taxes

Direct taxes are taxes paid directly by an individual to the government. The Central Board of Direct Taxes (CBDT) looks after the matters relating to the levy and collection of direct taxes. Some of the important direct taxes of the country are Income Tax, Wealth Tax, Property Tax, Gift Tax, Wealth Tax and Capital Gains Tax.
Indirect Taxes are taxes levied by the Government, the burden of which falls on another person. The matters relating to the levy and collection of indirect taxes are looked after by the Central Board of Indirect Taxes and Customs (CBIC). Examples of indirect taxes in the country include Goods and Services Tax (GST), Customs Duty, Stamp Duty and Entertainment Tax.

With respect to Direct Taxes, two legislations govern their levy, collection and implementation [2]https://cleartax.in/s/income-tax-law-india-components:

a. Income Tax Act, 1961 – The Income Tax Act, 1961 is an act levy, collect, administer, and recover income tax in India. The act helps determine the taxpayer’s income, contribution and penalties.

b. Finance Act, 2012 – The Finance Act, 2012 is an act that specifies the rates of various categories of income tax, the rates of tax deduction and the rules governing advanced tax.

However, these Acts contain certain defects by way of double taxation, low contributions, and complicated tax filings and so on.

To address these issues, the Finance Ministry of India introduced the Taxation Laws Bill, 2021.

OVERVIEW OF THE TAXATION LAWS BILL, 2021:

The Taxation Laws (Amendment) Bill, 2021 was introduced on August 5, 2021, in the Lok Sabha by the Finance Minister Ms. Nirmala Sitharaman as a step towards amending the Income Tax Act, 1961 and the Finance Act, 2012. The 2012 Act had amended the Income Tax Act to impose tax liability on income earned from sale of shares of a foreign company done before May 28, 2012 – i.e., on a retrospective basis. The ‘2012 retrospective taxation power’ was introduced by Former President of India Late Pranab Mukherjee, after the Supreme Court of India held that Vodafone could not be taxed for a 2007 transaction involving purchase of a 67% stake in Hutchison Whampoa for a whopping $11 billion. The retrospective tax was later invoked against Cairn Energy and its assets were frozen by authorities. The Bill proposes to nullify the retrospective basis of taxation.

The objective of the bill is to ensure that once specified conditions are fulfilled, the pending income-tax proceedings be withdrawn, any demands raised be nullified and any amount collected be refunded to the taxpayer without any interest.

TIMELINE OF THE BILL:

• August 5, 2021 – Bill introduced in the Lok Sabha
• August 6, 2021 – Passed in the Lok Sabha
• August 9, 2021 – Approval of Bill by Rajya Sabha
• August 28, 2021 – Issue of draft notification for framing rules to implement the Amendments of the Taxation Laws (Amendment) Act, 2021, Released

ANALYSIS OF THE TAXATION LAWS BILL, 2021:

Section 9 – S.9 of the Bill enumerates various categories of income that are deemed to accrue or arise in India [3]https://www.taxmann.com/post/blog/9055/analysis-of-taxation-laws-amendment-bill-2021/:

a. Income through or from any business connection in India;
b. Income through or from any property in India;
c. Income through or from any asset or source of income in India;
d. Income through the transfer of capital assets situated in India.

Explanation 5 to Section 9(1)(i)[4]https://icmai.in/upload/Taxation/Taxation_Laws_1008_21.pdf:

Explanation 5 to Section 9(1)(i) clarifies 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 situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
In other words, an asset or capital asset shall be deemed to have been situated in India, and income arising from transfer of such asset shall be deemed to accrue or arise in India if the following conditions are satisfied:

1. The asset or capital asset is a share (or interest) in a company (or entity) registered or incorporated outside India;
2. The share or interest derives its value substantially from the assets located in India; and
3. Such value may be derived directly or indirectly from the assets located in India.
However, the share or interest shall not be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets:
1. Does not exceed Rs. 10 crores; and
2. Does not represent at least 50% of the value of all the assets owned by the company or entity as the case may be.

Fourth Proviso to Explanation 5 of Section 9(1)(i):[5]https://icmai.in/upload/Taxation/Taxation_Laws_1008_21.pdf

The fourth proviso to Section 9(1)(i) provides that the provisions of Explanation 5 shall not apply, in respect of income accruing or arising through or from the indirect transfer of Indian asset made before 28.05.2012 to:
a. an assessment or reassessment to be made under Section 143, Section 144, Section 147 or Section 153A or Section 153C;
b. 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
c. an order to be passed deeming a person to be an assessee in default under Section 201(1).
In other words, the retrospective impact of Explanation 5 to Section 9(1)(i) shall be ignored if assets situated in India are indirectly transferred before 28.05.2012. Thus, the income accruing or arising through or from such indirect transfer of Indian assets or capital assets shall not be taxable in India.

Fifth Proviso to Explanation 5 of Section 9(1)(i) [6]https://icmai.in/upload/Taxation/Taxation_Laws_1008_21.pdf:

The fifth proviso to Section 9(1)(i) provides that the provisions of Explanation 5 shall not apply, in respect of income accruing or arising through or from the indirect transfer of Indian asset made before 28.05.2012 to:
a. an assessment or reassessment made under Section 143, Section 144, Section 147 or Section 153A or Section 153C;
b. an order passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154;
c. an order passed deeming a person to be an assessee in default under Section 201(1); or
d. an order passed imposing a penalty under Chapter XXI or under Section 221.
In other words, the retrospective impact of Explanation 5 to Section 9(1)(i) shall be ignored if assets situated in India are indirectly transferred before 28.05.2012. Thus, the income accruing or arising through or from such indirect transfer of Indian assets or capital assets shall not be taxable in India.

Sixth Proviso to Explanation 5 of Section 9(1)(i)[7]https://icmai.in/upload/Taxation/Taxation_Laws_1008_21.pdf :

The sixth proviso to Explanation 5 of Section 9(1)(i) provides that where any amount becomes refundable to such person, then such amount shall be refunded to him, but no interest under section 244A shall be paid on that amount.
The relief in cases of concluded assessments shall be given to only those assessees who satisfy the following conditions:
a. where the assessee has filed an appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;
b. where the said person has initiated any proceeding for arbitration, conciliation, or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India
with any other country or territory outside India, whether for protection of investment or otherwise, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or
notice, in such form and manner as may be prescribed;
c. the said person shall furnish an undertaking, in such form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise;
d. Any other condition as may be prescribed.

OPINIONS OVER THE TAXATION LAWS BILL, 2021:

The Taxation Laws Bill, 2021 has been opined in positive light as:
a. an amendment that portrays India as a viable investment destination.
b. a move that buries the ghost of retrospective taxation.
c. a proposal that promotes high tax certainty.
d. an important step towards restoring India’s reputation in the global forum and improving the ease of doing business.
e. directing quicker settlement of disputes.
However, there are others who view the proposal as:
a. complicating economic growth by way of taxation.
b. Increasing overall operation costs

CONCLUSION:

I would like to conclude by saying that the Taxation Laws Bill, 2021 benefits the tax system of the country in instilling confidence in domestic as well as foreign investors in the taxation framework of the country; Enabling faster economic growth; Saving time and costs by avoiding unnecessary litigations. It is surely going to put an end to faulty retrospective tax laws and thereby providing impetus to the country’s goal of becoming a $5 trillion economy.

 

 

 

P.S.MADHUMITHA

5th Year, B.Com., LL.B (Hons), School of Excellence in Law, Chennai

References

References
1 https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-taxation-discussed/17450
2 https://cleartax.in/s/income-tax-law-india-components
3 https://www.taxmann.com/post/blog/9055/analysis-of-taxation-laws-amendment-bill-2021/
4, 5, 6, 7 https://icmai.in/upload/Taxation/Taxation_Laws_1008_21.pdf

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