Retrospective taxation
Also called: Retrospective tax · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT
Meaning
Retrospective taxation means taxing past deals under a law that was changed later. The government amends the law now, but makes the change apply to transactions that were already completed under the old rules. It raises money, but it hurts tax certainty, which means being able to know your tax bill in advance. When investors cannot trust that the rules will stay fixed, they become wary of investing in the country.
Example
In 2012 the Supreme Court ruled in Vodafone's favour. The Finance Act 2012 then changed the law with effect from the past, so that indirect transfers of Indian assets could be taxed. An indirect transfer is a sale of shares abroad that gives the buyer control of assets in India. India lost the Vodafone and Cairn arbitrations in 2020. The Taxation Laws (Amendment) Act 2021 then withdrew the tax demands and refunded the money that had been collected.
Don't confuse with
- Clarificatory amendment: this only explains what an existing law always meant. Retrospective taxation creates a new tax burden on deals that are already over.
Related concepts
- Tax haven
- Transfer pricing
- Double Taxation Avoidance Agreement
- Base Erosion and Profit Shifting
- Significant economic presence
- Equalisation levy
- Pillar One
- Global minimum tax
- Automatic exchange of information