Retrospective Taxation

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 equalization 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;
a) Prospective amendment and
b) 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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. Validity of retrospective amendment/retrospective tax

As already mentioned retrospective tax is not as 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 analyzed