The meaning of the word ‘retrospective’ is ‘looking backward’. It relates to thinking about the past, ‘looking back over the past’, etc. In terms of taxation, retrospective tax means giving effect to the amendment in the present law before the date on which the changes were brought in.
Retrospective tax explained
A retrospective tax is one that is charged for transactions in the long past. It can be a new or additional charge on transactions done in the past. The government has moved to do away with retrospective tax now. Ideally, retrospective tax is to make adjustments when policies in the past and the present are so vastly different that tax paid before under the old policy could be said to have been less. Retrospective tax could correct that situation by charging tax under the existing policy.
Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and deals and charge companies from a time before the date on which the law is passed.
Countries use this form of taxation to rectify any deviations in the taxation policies that, in the past, allowed firms to take benefit from any loophole. Retrospective tax affects companies that had unknowingly or knowingly used the tax rules differently.
Not only India, but many other countries like the US, UK, Australia, Netherlands, Belgium, Canada, and Italy have retrospectively taxed firms.
For instance, if there is an amendment to the law and it is applicable from a specified date in the past, but not the future, it is called a retrospective amendment. Hence, retrospective tax simply means imposing an additional charge of tax via an amendment from a specified date in the past.
History of the controversial Retrospective tax in India
"Retrospective Taxation", these two words have roiled foreign investors looking at India over the years, and led to multiple disputes between the Indian government and global majors like Vodafone and Cairn. The retrospective tax provision was introduced by the United Progressive Alliance (UPA) government in 2012. It was an amendment to the Income Tax Act, 1961, which received the President’s assent in May 2012, allowing the government to ask companies to pay taxes on mergers and acquisitions (M&As) that happened before that date. This goes back to the time when UK-based telecom giant Vodafone bought a 67% stake in Hong Kong-based Hutchison Whampoa for $11 billion to which the Indian government raised a demand of Rs 7,990 crore in capital gains saying the company should have deducted the tax at source before making a payment to Hutchison. The company took the matter to the Supreme Court which eventually turned in favour of Vodafone.
One such indirect transfer was also made against the 2006 internal corporate restructuring carried out by UK-based Cairn Energy.
In September 2007, the Income tax department slapped Vodafone International BV with a tax demand of $2 billion. Five years later, SC set aside the I-T department's claim, saying transactions carried out in India cannot be taxed. Then Finance Minister Pranab Mukherjee brought in a bill, which was eventually passed by the Parliament, that would force companies like Cairn and Vodafone to be liable to pay taxes based on retrospective changes to the law. I-T department slapped Rs 3,100 crore tax notice on Vodafone India.
How the Income Tax department retrospectively taxed firms: Timeline
February 2012: I-T department slaps Rs 3,100 crore tax notice on Vodafone India.
December 2013: Income Tax Appellate Tribunal asked Vodafone to deposit Rs 200 crore.
January 2014: I-T department issues notice to Cairn raising a preliminary assessment of Rs 10,247 crore tax liability for its holding uncer Cairn Energy.
March 2015: The IT department demanded Rs 24,000 crore as Cairn UK made a capital gain of Rs 24,503 crore in the internal reorganisation.
Both Cairn and Vodafone filed lawsuits in international courts against the retrospective tax, which India lost.
Where does India's retrospective tax policy stand today?
On Thursday, August 5, 2021 the Indian government proposed to withdraw all tax demands under the retrospective law brought in 2012, on companies like Cairn Energy and Vodafone, and said it will refund the money collected to enforce such levies.