Retrospective Amendment And Retrospective Tax

Before every financial year begins, the Ministry of Finance presents its finance budget, which covers aspects such as how the previous year has gone and what are the proposals/plans for the next financial year in terms of revenue allocation to various sectors, changes relating to tax law provisions (both direct and indirect tax) etc. Such tax law changes, generally termed ‘amendments’, are proposed keeping in mind the ongoing developments, the welfare of taxpayers, loopholes which could not be plugged in earlier and also representations received by various stakeholders. For e.g., the extension of profit-linked deduction to a few more years, the introduction of new exemptions, the introduction of new tax levies such as equalisation levy etc. Once these proposals are accepted by both houses of parliament and receive the assent of the Hon’ble President, it become an enacted law.

These amendments can be of two kinds based on the specified date of its application;

• Prospective amendment &
• Retrospective amendment.

While prospective amendments are comparatively easy to handle and accept, at least based on the nature of the application, retrospective amendments create a lot of confusion and complexity and are not easily acceptable. Therefore, the date of application of the law plays a major role in determining its impact on taxpayers and being prepared and plan their next move. Hence, in this article, we have discussed retrospective amendment and covered the following topics: 

Prospective Amendment In Brief

The dictionary meaning of the word ‘prospective’ is something that is ‘likely to happen in future’ or ‘likely to be or become something specified in the future’. Therefore, the prospective amendment would mean any changes to the law that take effect in the future, either from the date of enactment of the new law or any specified future date. For e.g., the introduction of new Section 80TTB by the Finance Act 2018 provides for the higher deduction to senior citizens w.r.t interest income, and it is made applicable from the financial year 2018-19.

Retrospective Amendment

The dictionary meaning of the word ‘retrospective’ is ‘looking back over the past’, ‘relating to or thinking about the past’, ‘looking backwards’ etc. In a similar fashion, with respect to law or statute, 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. For example, the extension of exemption under Section 10(23C) to an income received by any person on behalf of the Chief Minister’s Relief Fund was made retrospectively from 1 April 1998 by the Finance Act 2017.

Retrospective Tax

Retrospective tax is nothing but 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 the specified date in the past.

For example, the Levy of tax on indirect transfers by the Finance Act 2012 retrospectively from 1961; the introduction of Section 14A for disallowance of expenditure related to exempt income in the year 2001 with retrospective effect from April 1962.

While retrospective amendment may or may not have an additional tax levy or charge, retrospective tax will have an additional tax levy.

The retrospective amendment changes the law so that it applies to events that have already occurred. This can have several consequences, including making people who have already broken the law liable for punishment or changing the outcome of civil lawsuits.

Reasons For Retrospective Amendment / Tax

Many times retrospective amendments are carried out to undo some of the decisions of judicial bodies that went against legislative intent or to remove certain anomalies in law. Sometimes it may be simply to benefit taxpayers in genuine cases and do away with undue hardship or difficulties faced by taxpayers.

For example, The Supreme Court of India held in its ruling pronounced prior to 2001 that in the case of composite business and indivisible business, the principle of apportionment is not applicable, and expenditure incurred in earning exempt income cannot be apportioned and disallowed due to indivisibility. Post the ruling, Section 14A was introduced in the year 2001, which disallows expenditure incurred by taxpayers in relation to exempt income irrespective of the composite nature of business. The government also came up with Rules providing the mechanism to determine the amount to be apportioned and disallowed. While the tax department claimed this amendment to be to clarify the intention of the legislature with respect to expenses relating to earning exempt income, it is also due to the Supreme Court’s ruling as mentioned above.

Major Retrospective Amendments/Tax In Indian Income Tax

1. In the Finance Act of 2012, a retrospective amendment was made to the 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. 
2. To date, one of the major and most controversial retrospective amendments carried out was bringing indirect transfer under the tax bracket by the Finance Act 2012.

The Supreme Court, in Vodafone, held that Section 9 does not authorise tax authorities to tax capital gains derived from the indirect transfer of shares of an Indian company. The main transaction was between two foreign companies to acquire a foreign company that had majority shares in an Indian company. It may be noted that the quantum of transactions and tax foregone by the tax department due to this Supreme Court ruling was huge.

Therefore, the Government of India (Ministry of Finance) amended Section 9 of the Income-tax Act, 1961 vide Finance Act 2012 and provided that shares or 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 retrospectively from 1962. This would mean the Vodafone case, where entire transactions were already carried out and the ruling was also pronounced by the Supreme Court, could be brought to tax with this retrospective amendment.

Validity Of Retrospective Amendment/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 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, retrospective amendment / retrospective tax by itself does not become unreasonable or invalid. The validity/reasonableness of retrospective amendment/tax depends on the facts and circumstances of each case and needs to be analysed on the merits of amendment in light of facts and circumstances under which such amendment is made.

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

Is Retrospective Amendment Constitutional?

There is no clear answer to this question. The Constitution does not expressly forbid retrospective amendment, but the courts have sometimes struck down retrospective laws as being unfair or contrary to the principle of the rule of law.