Scrapping of Retrospective Taxation

In News

Parliament recently passed Taxation Laws (Amendment) Bill 2021 to bury retrospective taxation.

What is Retrospective Taxation?

• “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’. 
• Therefore, retrospective tax means creating an additional charge or levy of tax by way of an amendment from a specified date in the past.

For Example:

• Finance Act 2012 was passed to retrospectively levy tax on indirect transfers.
• Vodafone and Cairn India Issues erupted due to these retrospective taxation.
  • In both the cases, India lost to private firms and at the end lost both ways: 
    • trust of companies and 
    • damages paid to them as awarded by court.

Source: Indian Express

How was it Impacting Business?

It hampers the business environment in following ways:

• Creates a lot of confusion and complexity: It is because backdated transactions are to be traced and rechecked.
• Creates uncertainty: Businesses fear adverse terms and conditions in future.
• Increases litigation: As companies feel cheated, they tend to go to local courts or Permanent Court of Arbitration.
• Against the internationally accepted taxation principles: It is against the ease of doing business and widely accepted taxation rules.

Benefits of New Law

• Increased trust of International Investors: This may translate into more FDI.
• Higher Ease of Doing Business: India is improving its ranking by leaps and bounds in World banks Ease of Doing Business. 
  • It will further help us on that front.
• More influx of Companies leaving China: Till now maximum benefit of anti-chinese sentiments were taken by South-East Asian Nations. 
  • This decision mixed with other reforms could alter the hotspots.
• Positive Sentiments in Share Market: This will also create a positive sentiment in share market, leading to rise in share prices of few companies.
• Less NPAs: Vodafone-Idea which is facing a major loss due to this taxation may again get a fresh breath of life.
  • It may reduce pressure on banks who have lent nearly Rs25000 crore to Vodafone- Idea. 

Challenges

• Tax Avoidance: it will allow some big corporations to exploit loopholes for tax avoidance.

Way Forward

• An investment-friendly business environment is the need of the hour to boost the economy post pandemic.
• Bureaucrats need to continuously keep themselves updated about possibilities and learn from international practices to avoid such tax avoidances.

Source: BS