The annual budget presented by the Indian government every year is an amendment to the existing tax laws to plan the proposals and revenue collection for the coming year. These amendments are introduced keeping in mind the welfare of the taxpayers, loopholes in the existing law, and the government’s expenditure budget. These amendments can be of 2 types - prospective and retrospective. Retrospective taxes are comparatively more complex and controversial. In this article, we will explain the retrospective tax meaning in detail.
What is Retrospective Tax Meaning?
The literal meaning of retrospective is to look at the past or talk about the past. Concerning law, retrospective refers to any law or act that is enforceable from a date in the past. In other words, the retrospective tax is a type of tax provision that takes effect from the past. For example, if the Indian government introduces a certain exemption from tax on 1st Feb 2023, effective from 31st March 2022, the exemption will be treated with a retrospective effect. Under Retrospective taxation govt. can impose taxes on certain products, items, or services and deals and charge for the period that is before the date on which the law is passed.
What is Retrospective Amendment?
While retrospective tax is a new tax provision introduced with a retrospective effect, the retrospective amendment is a change in the existing provisions/law that takes effect from a date prior to the current date. This is done to undo a judicial decision or remove certain anomalies of law.
Why are Retrospective Amendment and Tax Important?
A retrospective tax is a law that is applied with retrospective effect. Here are the reasons why the Indian government applies a retrospective tax.
Retrospective tax law aims to bring about clarification in the law and to identify and amend loopholes that have the potential to promote tax evasion.
A retrospective tax is also imposed to increase the government's overall tax revenue.
It also helps protect the interest of the taxpayers and save them from any kind of exploitation.
What are the Major Retrospective Amendments in Indian Taxation History?
There have been many instances of retrospective taxes and retrospective amendments in the Indian history. One of the major and famous retrospective tax example is in case of Vodafone Hutchison Case and Cairn Energy Case.
As per the retrospective tax amendment, any company registered in India deriving a major part of its value from assets located in India will be deemed to have its shares located in India.
The Finance Act 2012 brought about one of the most debatable changes that brought an oblique switch beneath the tax bracket.
In ruling of the Supreme Court under the Vodafone-Hutchison case, It was established that the transfer of shares was indirect and took place through a foreign entity that held high stakes in the Indian company. Therefore, the transaction cannot be considered the transfer of capital assets situated in India. The Union government amended the finance act and introduced retrospective taxation to cover the deal in the ambit of taxation.
Is Retrospective Amendment/Tax Welcomed?
The existence of retrospective tax is not easily welcomed by Indians as it creates an uncertain environment that disrupts the normal course of business. It disturbs the treatment and tax planning that the taxpayer has already done based on the existing law at that time. Therefore, retrospective tax has always been a matter of controversy as it also demeans the confidence of foreign investors in Indian laws.
However, if the retrospective tax is aimed at the welfare of the taxpayers, it is welcomed and accepted by the public. Therefore, the validity of retrospective tax depends on the situation in which it has been introduced.
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