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Retrospective Tax in India Explained

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The retrospective amendment is the legal process of amending a law so that it applies to events that took place before the amendment was enacted. This is usually done to correct an oversight or clarify the original law’s intent. A retrospective tax is a tax imposed on income or transactions that took place in the past. This is usually done to raise revenue or discourage certain types of behavior. 

Did You Know? Retrospective amendments can have significant impacts on taxpayers, especially if they result in additional tax liability. 

What Are Retrospective Amendments and Retrospective Tax? The amendment was brought to enable the Central Government to tax income from the sale of shares of a foreign company to an Indian company. The Lok Sabha passed the amendment by a voice vote. The Retrospective amendment has been strongly criticized by the Opposition parties and some ruling party members. 

The Central Government has seen the amendment as an attempt to tax retrospective income that impacts fundamental property right. The amendment has also been criticized because it will adversely affect foreign investors and increase the cost of doing business in India. The Retrospective amendment is likely to face legal challenges, and it remains to be seen whether the courts will uphold it. 

Also Read: Income tax Calculator – Calculate Your Taxes For FY 2021-22 Use Tax Calculator Online

Purpose of a Retrospective Amendment 

In India, a retrospective amendment is a tax or amendment that is applied retroactively, that is, with effect from a date before it was enacted or came into force. 

  • Such an amendment or tax aims to clarify the law or to plug a loophole that taxpayers have exploited. 
  • It may also be used to raise revenue. 
  • Ex-post facto law might impose various new obligations on the transactions or any act committed by an individual or impair the vested rights

How Does the Retrospective Amendment work?  

In India, a retrospective tax is levied on an activity or transaction that took place in the past. This tax is typically imposed on activities or transactions that were not previously taxed or on activities or transactions that were under-taxed. 

Retrospective taxes can be imposed on both individuals and businesses. The government typically imposes retrospective taxes to raise revenue. In some cases, the government may also impose retrospective taxes to penalize taxpayers for activities or transactions deemed harmful to the economy or society. Retrospective taxes can be very controversial and often lead to public outcry. 

In India, the imposition of retrospective taxes has been a particularly controversial issue. In 2012, the Indian government imposed a retrospective tax on Vodafone, a UK-based telecommunications company. The tax was imposed on Vodafone for its purchase of a majority stake in an Indian telecom company. The tax was retroactively applied to the transaction, resulting in Vodafone owing the Indian government ₹20,000 crores.

Also Read: Guide For Uploading TDS Returns On The Income Tax Portal

Major Retrospective Amendments In Indian Income Tax

  • In the Finance Act of 2012, a retrospective amendment was made regarding tax on distributed income by mutual funds and real estate investment trusts. In 2013, a retrospective amendment occurred on tax for long-term capital gains. 
  • The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.  
  • Until date one of the essential and maximum debatable retrospective changes carried out changed into bringing an oblique switch beneath the tax bracket by using Finance Act 2012.
  • In the case of Vodafone, the Supreme Court held that the most controversial retrospective amendment derived from the indirect switch of shares of Indian corporations at the same time as the principle transaction changed between foreign organizations to collect a foreign agency which had majority stocks in the Indian organization.

Also Read: Step-by-Step Guide for E-Verifying Your Income Tax Return

Validity of Retrospective Amendment Tax

The validity of retrospective amendment in India has been a matter of debate for a long time. In India, the retrospective operation of any statute is prohibited for any civil offence. The Constitution of India does not give permit for retrospective operation of any given act unless there is any implication in law stating that the law that is there has to be retrospective in nature.

The retrospective amendment has been a concern for taxpayers as it creates an uncertain environment and can lead to double taxation. However, the government has defended the retrospective amendment on the grounds that it is necessary to prevent tax evasion and avoidance. The validity of retrospective amendment in India is still a matter of debate, and the Supreme Court is yet to give a clear verdict on the matter. 

Conclusion

Retrospective amendments to tax laws can have both benefits and challenges. While they can be used to fix errors or close loopholes, they can also create uncertainty and be used unfairly. Retrospective amendments can create various challenges. One is that they can create uncertainty, as businesses may not be sure what the tax implications of past actions will be. This can make it difficult to plan. Additionally, retrospective amendments can unfairly target specific individuals or businesses.

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