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What is Retrospective Tax? What are its Implications? Let us Explain it Using Examples

Retrospective tax enables a country to pass a rule on taxing certain products or services. It is charged for transactions in the long past and can be a new or additional charge on transactions done previously. Several countries apart from India including the US, the UK, the Netherlands, Canada, and Italy have retrospectively taxed companies that derived benefits due to loopholes in the previous law.

Retro Tax India

What is Retrospective Tax/ Retro Tax India?

As described by many tax consultants in India, Retrospective tax means an extra charge or levy of tax by amendment from a specified date. Levy of tax on indirect transfers by Finance Act 2012 retrospectively from 1961 is one example. Another example could be introduction of Section 14A for disallowance of expenditure related to exempt income in the year 2001 with retrospective effect from April 1962.

In 2007, Vodafone acquired Hutch for an$ 11 billion deal through an overseas holding company. In May 2007, Vodafone had bought a 67% stake in Hutchison Whampoa for $ 11 billion. This included the mobile telephony business of Hutchison in India. In September, the Indian government for the first time raised a demand for a large sum in capital earnings and withholding duty from Vodafone, saying the company should have subtracted the duty at source before making payment to Hutchison. As a response to this, Vodafone Company challenged the demand notice in the Bombay High Court. It was ruled in favor of the Income Tax Department.

Later on, Vodafone challenged the High Court judgment in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and, it didn’t have to pay any levies for the stake purchase.

Some of the companies and firms that had paid advance taxes earlier in 2020 have now been asked to cough up additional taxes and interest. This became mandatory after a retrospective law was introduced in the 2021 budget. In the current year, the government modified some of the crucial provisions of slump sale and goodwill valuation. This led to changes in transactions undertaken last year and requiring the payment of additional taxes.

Some of the companies and firms that had paid advance taxes earlier in 2020 have now been asked to cough up additional taxes and interest. This became mandatory after a retrospective law was introduced in the 2021 budget. In the current year, the government modified some of the crucial provisions of slump sale and goodwill valuation. This led to changes in transactions undertaken last year and requiring the payment of additional taxes.

Retrospective tax not only causes uncertainty but also creates an additional levy on the transaction which is already concluded when the provisions of law were different. The tax by itself does not become unreasonable or invalid. This would depend on facts and circumstance of each case.

Any retrospective amendment which benefits taxpayers is welcome. At the same time, any non-beneficial retrospective amendment / retrospective tax which is only clarificatory in nature is also acceptable. However, any unreasonable new tax levy on a transaction which is closed in light of the then existing law would be unfair. It might cause disruption and the validity needs to be analysed.

Summing up:-

The retrospective tax came into being in the year 2012. This tax implies giving effect to the alteration in the law ahead of the date on which the changes were done. It taxes a transaction that was done prior to the formulation of law. The Centre has finally scrapped the infamous retrospective tax law since it was a key obstacle to doing successful business in India.

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