Last week the lower house of the Indian Parliament passed The Taxation Laws (Amendment) Bill, 2021 (the Bill). The Bill is significant. It removes the retrospective application of the rules on the taxation of gains arising on the transfer of shares in a foreign company where such shares derive their value substantially from assets located in India. That gives a reason to cheer, especially for the corporates caught in the 17 proceedings launched under those rules. The big question is, however: what does this mean for those looking to invest in India?

In practical terms, not much. 

The amendments aim to ensure that any indirect transfer of Indian assets undertaken before 28 May 2012 (i.e., the date on which the rules on indirect transfers became law) is not caught by the rules. The rules, however, stay the same (so no respite from worrying about them on any current or future India-related M&A deal).

In tax policy terms, there is some hope that this is the start of a broader course correction to attract foreign investors. The official statement accompanying the Bill mentions the important role foreign investment has to play in promoting faster economic growth and employment in a pandemic-ravaged India. But the scope of the Bill - and the backdrop to it - invites some skepticism. 

The Bill provides for the nullification of proceedings commenced by the Indian tax authority with respect to pre-28 May 2012 indirect transfers - but only if certain conditions are met, such as the withdrawal of (or the provision of an undertaking to withdraw) pending litigation and an undertaking that no claim for cost, damages, interest, etc., shall be filed. It also provides for the refund of amounts paid pursuant to those proceedings, but without any interest. This comes nine years after the controversial law was introduced overturning the verdict of the highest court of the country that gains arising from indirect transfers were not taxable in India. It also comes after much global criticism and two unanimous arbitral awards against India in international Bilateral Investment Protection Treaty disputes, both of which the country refused to accept.

Given this rather heavy baggage, it is difficult to see the Bill as anything more than a welcome first step. Going forward, it would need a lot of sensible, transparent and rules-based policy-making on tax and non-tax fronts to fully restore investor confidence.