Centre seeks to redact retrospective tax law

Centre seeks to redact retrospective tax law

Part of: GS Prelims and GS- III – Economy

In news Union Finance and Corporate Affairs Minister recently introduced the Taxation Laws (Amendment) Bill in the Lok Sabha

• The bill aims to nullify the relevant retrospective tax clauses that were introduced in 2012 to bring past indirect transfer of Indian assets under the ambit of taxation.
• The retrospective tax law of 2012 was used to raise large tax demands on foreign investors such as Vodafone and Cairn Energy,
• It was also blamed for impairing India’s investment climate.

What are the major features of the bill?

• As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped.
• Any taxes already collected shall be repaid.
• To be eligible, the concerned taxpayers would have to drop all pending cases against the government and promise not to make any demands for damages or costs.

What is retrospective taxation?

• As the name suggests, retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed
• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• Global Norm: Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.

Consequence of Retrospective Taxation on Market 

• Hurts Companies: While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
• Hurts Investor Confidence: The amendment was criticised by investors globally, who said the change in law was “perverse” in nature. This impacted the market sentiment and the flow of foreign funds to India.

News Source: TH