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India revokes retrospective applicability of tax on indirect share transfers

Updated: Aug 9, 2021

Amit Jain and Xerxes Antia

Indian parliament proposes not to levy taxes on indirect transfers (i.e. transfer of shares of a foreign company deriving substantial value from assets in India) undertaken prior to May 28, 2012 (subject to fulfilment of certain conditions)


  • In its landmark Vodafone International Holdings B.V. judgment[1], the Supreme Court of India (SC) had ruled in 2012 that the transfer of shares of a company incorporated outside India would not be taxable in India.

  • However, considering the verdict of the SC to be inconsistent with the legislative intent, the Indian Government introduced “clarificatory” changes to the Income Tax Act (ITA) in 2012 and indirect transfers were made taxable with retroactive effect from 1 April 1962.

  • Pursuant to the retrospective amendment to the ITA, the Indian tax authorities raised tax demands in 17 different cases including against Vodafone International B. V. and Cairn UK Holdings Limited. Out of these 17 cases, in 4 cases arbitration was invoked under the applicable Bilateral Investment Protection Agreements (BIPAs) signed by India with the United Kingdom and the Netherlands with the applicable arbitral tribunals ruling in favor of the taxpayers in two cases viz., in the cases of Cairn[2] and Vodafone[3] respectively.

  • The move to levy retrospective taxes has been hugely criticized on the grounds that Government of India has failed to provide tax certainty and a stable, predictable, foreseeable tax regime to foreign investors. The arbitral tribunals constituted for the Vodafone and Cairn arbitrations have each considered the retrospective amendment to be a breach of India’s obligation under the BIPAs.

The Taxation Laws (Amendment) Bill 2021

Considering the importance and the need to attract foreign investments into India, especially post the economic set back due to COVID-19, The Government of India therefore introduced the Taxation Laws (Amendment) Bill, 2021 (Bill) to remove the retrospective effect of the 2012 amendment to the ITA. The Bill has been subsequently passed by the Lok Sabha (the lower house of India’s Parliament) on August 6, 2021. The proposals of the Bill are aimed at achieving the following objectives:

  • No levy of taxes on indirect transfers undertaken prior to 28 May 2012 (specified date);

  • No assessment to be made/no enforcement of tax demand/ no notices to be issued in respect of indirect transfers undertaken prior to the specified date;

  • Nullification of demand orders already raised/assessment made/ penalty levied in respect of indirect transfers undertaken prior to the specified date on fulfilment of specified conditions (viz. withdrawal of pending litigations in all forums); and

  • Refund of taxes collected pursuant to demand order issued in respect of indirect transfers undertaken prior to the specified date. However, such refund would be without any interest


The Bill comes as a positive and welcome move by the Government of India and aims to restore the confidence of foreign investors. After the Bill had been introduced in the Lok Sabha, a senior official of the Government of India[4] reiterated the importance of foreign investment to the Government of India and stated that “India is committed to predictability in taxation”. However, the actual impact and effectiveness of the Bill will depend on whether disputing taxpayers actually choose to withdraw their appeals / arbitration proceedings against Government of India from international courts/tribunals. Certain aspects of the Bill such as there being no interest on any refund of taxes, no compensation for the assets seized / sold to recover the tax dues (e.g. the sale by the Indian tax authorities of the shares held by Cairn UK Holdings Limited (Cairn UK) in Vedanta Limited as well as the seizure of dividend due to Cairn UK to recover tax dues), no compensation towards the litigation cost incurred for almost a decade, could be considered as unjustified and push some of the affected entities to continue with their ongoing disputes.

Overall however, this must be welcomed as a significant positive move forward by the Government of India in making India an attractive jurisdiction for foreign investment and removes one of the more significant pain points foreign investors had.


[1] Vodafone International Holdings vs Union of India & Another (2012), 6 SCC 613. [2] Cairn Energy Plc and Cairn UK Holdings Limited v. Republic of India. [3] Vodafone International Holdings B. V. vs Republic of India. [4] The Finance Secretary, Government of India, Mr. TV Somanathan


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