Retrospective amendment and retrospective tax

Before every financial year begins, 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 as ‘amendments’ are proposed keeping in mind on-going developments, welfare of taxpayers, loopholes which could not be plugged in earlier and also representations received by various stakeholders. For eg: extension of profit linked deduction to few more years, introduction of new exemption, introduction of new tax levy such as equalisation levy etc. Once these proposals are accepted by both houses of parliament and receives the assent of Hon’ble President, it becomes an enacted law.

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

• Prospective amendment and
• Retrospective amendment.

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

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Prospective amendment in brief

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, prospective amendment would mean any changes to law that takes effect in the future either from date of enactment of new law or any specified future date. For eg: Introduction of new Section 80TTB by Finance Act 2018 which provides for higher deduction to senior citizens w.r.t interest income and it is made applicable from financial year 2018-19.

Retrospective amendment

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, 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 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 specified date in the past. For eg:

Levy of tax on indirect transfers by Finance Act 2012 retrospectively from 1961; 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.

Reasons for retrospective amendment / tax

Many a 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 law. Sometimes it may be simply to benefit taxpayers in genuine cases and do away with undue hardship or difficulties faced by taxpayers.

For eg: When Supreme Court of India held in its ruling pronounced prior to 2001 that in case of composite business and indivisible business, 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 taxpayer in relation to exempt income irrespective of composite nature of business. Government also came up with Rules providing the mechanism to determine the amount to be apportioned and disallowed. While tax department claimed this amendment to be to clarify the intention of the legislature with respect to expenses relating to earning of exempt income, it is also due to Supreme Court’s ruling as mentioned above.

Major retrospective amendments/tax 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 Indian company. It may be noted that 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 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 transfer of such shares or interest in foreign company deriving its substantial value from assets located in India was brought under tax levy. Government did not stop at this amendment of new levy but made it effective retrospective from 1962. This would mean Vodafone case where entire transactions were already carried out and ruling was also pronounced by 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. 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. Validity/reasonableness of retrospective amendment/tax depends on facts and circumstance of each case and need to be analysed 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 / 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 need to be analysed.