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Retrospective Taxation. What’s the Hype all about?

On 6th August 2021, the Government passed The Taxation Laws (Amendment) Bill, 2021 burying the controversial Retrospective Taxation. This step has been hailed by many as a step in the right direction towards creating a conducive business environment. 

But as experts delve into the nitty-gritty of the possible impacts that this amendment can cause, let us take a moment to understand what retrospective taxation is and why has it been so controversial.

What is Retrospective Taxation?

Literally speaking, the word retrospection means looking back into the past. So, if we piece together “retrospective” and “tax” it would roughly translate into taxing an activity or transaction that has happened in the past and that is exactly what Retrospective tax is.

It can be a new charge altogether or an addition to the amount that has been charged. Now an obvious question that would come up is why would government tax a transaction that has happened way back in the past?

Well, it is mainly seen as a corrective measure. If the policies in the past and present are different to the extent that taxes collected under the previous policy is deemed grossly less than the present one, then retrospective tax comes into play in order to make up for that gap.

Why is it so controversial?

This provision was introduced in 2012 by the UPA government as an amendment to the Income Tax Act, 1961. This introduction was almost a reaction to the Government’s spat with Vodafone.

Vodafone had acquired Hutch for an $11 billion deal by acquiring the shares of an overseas subsidiary company in 2007. Now, the government stated that the telecom giant owed the ITD around  INR 22,100 crores including taxes and penalties.

Vodafone took the case to the Supreme Court and the Court ruled in favour of Vodafone.

The Government had a similar tussle with Cairn wherein the ITD demanded INR 24,000 crore from the company. Both the companies took the government to the International tribunal with regards to Retrospective Tax and the government lost in both cases.

This tax had proven to be a roadblock when it came to the inflow of international investment in the country and hence there have been constant demands for doing away with this provision. 

What changed?

The Government has introduced an amendment in the 1961 Income Tax Act which calls for burying the provision of Retrospective Tax. It states that no tax demand can be raised in future as per this retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.

The government has also stated that it stands committed to refund the money that it has collected from this levy.

This move has mostly been appreciated from all circles and is a reflection of the Government’s commitment towards building a conducive and favourable business environment in India. Over the last years, many initiatives have been taken to induce a sense of confidence among Global investors regarding doing business in  India. An increase in foreign investments in the last few years bears witness to the fact that these endeavours have been borne fruit. 

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