Retrospective tax policy struck down

Retrospective tax policy struck down
  • In a move to bury the controversial policy of retrospective taxation, the government proposed amendments to the Income-tax Act and Finance Act, 2012 to effectively state that no tax demand shall be raised for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.
  • The Bill adds that demand raised for indirect transfer of Indian assets made before May 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of an undertaking for withdrawal of pending litigation, and furnishing of an undertaking to the effect that no claim shall be filed.

What is retrospective tax?

  • A retrospective tax is one that is charged for transactions in the long past. It can be a new or additional charge on transactions done in the past. The government has moved to do away with retrospective tax now. Ideally, retrospective tax is to make adjustments when policies in the past and the present are so vastly different that tax paid before under the old policy could be said to have been less. Retrospective tax could correct that situation by charging tax under the existing policy.
  • Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and deals and charge companies from a time before the date on which the law is passed.
  • Countries use this form of taxation to rectify any deviations in the taxation policies that, in the past, allowed firms to take benefit from any loophole. Retrospective tax affects companies that had unknowingly or knowingly used the tax rules differently.
  • Not only India, but many other countries like the US, UK, Australia, Netherlands, Belgium, Canada, and Italy have retrospectively taxed firms.
  • For instance, if there is an amendment to the law and it is applicable from a specified date in the past, but not the future, it is called a retrospective amendment. Hence, retrospective tax simply means imposing an additional charge of tax via an amendment from a specified date in the past.

BACKGROUND: Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill in the Lok Sabha to nullify the tax clause provision that allows the government to levy taxes retrospectively. The government has been fighting legal cases against Vodafone and Cairn Energy on taxes it has claimed retrospectively on transactions these entities entered into relating to operations in the country. Both the U.K.-based companies have won international arbitration rulings that held the Indian government in breach of bilateral investment protection agreements with the Netherlands and the U.K. respectively.

It has also been proposed “to provide that the demand raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed.