Indian tax law is routinely amended by the Parliament. While well-reasoned amendments serve as a tool to rectify lacunae in the existing law, retrospective amendments are inherently controversial.


Retrospective amendments introduced in 2012 enabled the Government to tax gains on certain transactions from 1-4-1961. The tax net was widened to include share transfers of foreign entities deriving substantial value from assets in India (also colloquially referred to as “indirect transfer”). Against this backdrop, there was widespread apprehension on the possible negative impact of capital inflows in an emerging economy like ours.


Fast forward to today, the Government has passed a separate amendment[1] (2021 Act) in the Income Tax Act to nullify the retrospectivity in the law on offshore indirect transfers undertaken prior to 28-5-2012. Accordingly, orders raising demand on account of retrospective charge would stand nullified where the taxpayers agree to withdraw all pending litigation and waive their rights in all forums (including international arbitrations). As part of such trade-off, the Indian Government will refund all taxes collected on account of such retrospective application of law.



Offshore indirect transfers took center stage during the Vodafone[2] controversy wherein the  Supreme Court unequivocally held that Indian domestic tax law (at the time) did not permit taxing an offshore indirect transfer. However, the legislature expressed that the Supreme Court judgment was   inconsistent with the legislative intent of the then existing provisions under Indian tax law (as acknowledged by the Statement of Objects and Reasons of the Bill of 2021 Act). Subsequently, the Parliament retrospectively amended the statute to “clarify” that an offshore indirect transfer in India has always been deemed to be a taxable event.


In some other parts of the world too, Revenue Authorities have sought to tax offshore indirect transfers (such as Bharti Airtel’s acquisition of Zain Telecom in Africa and purchase of Petrotech by Ecopetrol in Peru). From a source country perspective, transferring source country’s assets through indirect share transfers at an offshore level is nothing but an effective “transfer” of assets in the source country. The source country naturally wants its share of the pie and claims tax on proportionate gains attributable to value derived from the assets located in the source country.

Ensuing disputes and arbitrations

The need to undertake concrete measures to address the negative effect on foreign investor sentiment was evident almost immediately. An Expert Committee chaired by Dr Parthasarathi Shome in 2012 made a case for the amendments to be made effective prospectively[3]. However, despite successive changes of Governments, the amendments stayed in the statute.


According to Government’s own data, tax demands were raised in 17 cases involving indirect transfers undertaken prior to 2012. Out of the above, two cases were stayed by the High Courts and bilateral investment treaties (BITs) with UK and the Netherlands were invoked in other four. In the past few months, Arbitral Tribunals ruled in favour of the taxpayers in the arbitrations of Vodafone International Holdings BV v. Republic of India (Vodafone)[4] and Cairn Energy Plc and Cairn UK Holdings Ltd. v. Republic of India (Cairn)[5]. The tribunals based their view upon violation of the “fair and equitable treatment” standard guaranteed to the investors under bilateral investment treaties. Consequently, the Arbitral Tribunal awarded Cairn a billion dollar in damages for the “total harm” suffered by them as a result of breach of BIT with India. Such cases are a reminder of limits placed by international law upon sovereign right of taxation. International law recognises States sovereign right to tax and determine whether a specific transaction is chargeable to tax or not. However, the manner and imposition of tax on the foreign investor can be tested on the anvil of “fair and equitable treatment” under various BITs.


Until recently, news reports suggested that India did not accept the arbitration awards and appealed the decision in both Vodafone[6] and Cairn case[7].  At the same time, Cairn moved the United States District Court in the Southern District of New York (SDNY) on 14-5-2021 stating that they intended to enforce the arbitration award[8]. Cairn sought seizure of assets of Air India as “an alter ego of Indian Government” on the premise that Air India is State owned and “legally indistinct” from the State. For now, the US District Court has stayed the proceedings in light of any potential settlement that might be agreed between Cairn and India[9].


Course correction


The key aspects of the 2021 Act are as follows:

  • Non-levy of taxes on offshore indirect transfers undertaken prior to 28-5-2012 i.e. the law on taxation of indirect transfers has been made prospectively applicable from the date of the amendment.
  • Government would nullify the demands raised, subject to withdrawal of pending litigation by the taxpayers (including, international arbitration). The taxpayers are also required to furnish an undertaking waiving their rights to seek or pursue any remedy in connection thereto.
  • Refund of taxes which were collected pursuant to demand raised on account of indirect transfers. However, the Government would not be paying any interest on refund of the tax amounts.


The enactment of 2021 Act as a means to settle the long-drawn controversy is a welcome move. Though delayed, the amendment, along with the Government’s efforts to revamp the tax ecosystem to bring out a change in how taxpayers are assessed could enhance investor confidence. Having said that denial of interest on principal tax amount not only denies the existing right of a taxpayer enshrined in the statute book, but it also results in inequitable treatment. However, the larger construct behind the enactment cannot be faulted with.


Way forward

It is hoped that 2021 Act will draw the final curtains to the decade long controversy. There are however some notable lessons that may be drawn from this matter:

  • Changes in law, specifically tax law, should be guided by sound policy rather than revenue considerations alone. While the controversy disparaged India’s image as an investment jurisdiction, no meaningful revenue was collected from such measure. In a world driven by cross-border investments, having a sound tax policy will ensure that India is seen positively as a country that honours its treaty obligations and presents tax certainty which will in turn attract more investment, possibly leading to higher tax collections.
  • In addition, considering the changing international tax ecosystem, it would serve well if the dispute resolution mechanisms were relooked at to provide for a faster resolution of tax disputes.

Partner, Khaitan & Co.

†† Associate, Khaitan & Co.

[1] Taxation Laws (Amendment) Act, 2021, See HERE

[2] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC  613 : (2012) 341 ITR 1.

[3] See HERE.

[4] (2012) 6 SCC  613

[5] PCA Case No. 2016-7.

[6]See HERE.

[7]See HERE.

[8]See HERE.

[9]See HERE.

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