In this article “Retrospective Tax and Amendment Explained” firstly we will see the difference between Retrospective Tax and Restrospective Amendment and after that, we will see all the aspects of retrospective tax. In this article, all the topics are covered in an FAQ manner.
What is Retrospective tax?
Retrospective tax is a combination of two words “retrospective” and “tax” where “retrospective” means taking effect from a date in the past and “tax” refers to a new or additional levy of tax on a specified transaction. Hence, retrospective tax means creating an additional charge or levy of tax by way of an amendment from a specified date in the past.
What is Retrospective amendment?
Dictionary meaning of the word ‘retrospective’ ‘looking backwards’. So it simply means ‘taking effect from a date in the past’. Therefore, if there is an amendment to the law and it is applicable from a specified date in the past but not future, it is termed as a retrospective amendment.
Difference between Retrospective Tax and Retrospective Amendment.
While retrospective amendment may or may not have an additional tax levy or charge on any individual or company but in retrospective tax will have an additional tax levy.
Reasons behind retrospective tax and amendment
Many times retrospective amendments are carried out to undo some of the decisions of judicial bodies which went against legislative intent or for removing certain anomalies in the law. Sometimes it may be simply to benefit taxpayers in genuine cases and do away with undue hardship or difficulties faced by taxpayers.
Major retrospective amendments and taxes in Indian income tax
Till date one of the major and most controversial retrospective amendment carried out was bringing indirect transfer under tax bracket by Finance Act 2012. Supreme Court in the case of Vodafone held that Section 9 does not authorize tax authorities to tax capital gains derived from indirect transfer of shares of Indian company while the main transaction was between two foreign companies to acquire a foreign company which had majority shares in the Indian company. It may be noted that the quantum of transaction and tax foregone by tax department due to this Supreme Court ruling was huge. Therefore, Government of India (Ministry of Finance) amended Section 9 of Income-tax Act, 1961 vide Finance Act 2012 and provided that shares our interest in any foreign company/entity shall be deemed to be situated in India if such shares or interest derives its substantial value from assets located in India. Any capital gain from the transfer of such shares or interest in a foreign company deriving its substantial value from assets located in India was brought under tax levy. The government did not stop at this amendment of the new levy but made it effective retrospective from 1962. This would mean Vodafone case where entire transactions were already carried out and the ruling was also pronounced by Supreme Court could be brought to tax with this retrospective amendment.
The validity of retrospective amendment and retrospective tax
As already mentioned retrospective tax is not so easily welcomed by taxpayers as it creates an additional levy on the transaction which is already concluded when the provisions of the law were different. A taxpayer would have planned his finance and tax based on the law as it existed at that time and disturbing the same by way of unjust and unwarranted retrospective amendments is unreasonable. However, the retrospective amendment and retrospective tax by themselves do not become unreasonable or invalid. Validity/reasonableness of retrospective amendment/tax depends on facts and circumstance of each case and needs to be analyzed on the merits of amendment in light of facts and circumstance under which such amendment is made.
To sum up, any retrospective amendment which benefits taxpayers is welcome and non-beneficial retrospective amendment and retrospective tax which is only clarificatory in nature are acceptable. However, any unreasonable and unexpected new tax levy on a transaction that is closed in light of the then-existing law would be unfair and cause disruption and validity need to be analyzed.
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