The word retrospective is very much in discussion for anyone dealing with Indian Tax Laws. What is the meaning of Retrospective?  The Dictionary meaning of the word Retrospective is “looking back or dealing with past events or situations”. A retrospective law is one that is to take effect, in point of time, before it was passed. Thus when any tax laws are amended having its effect from the past date, they are known as Retrospective Amendments. To illustrate, if the government amends any provisions of the Act today but makes the same applicable from a past date, for example with effect from 1^st April, 2000, such amendment would be called retrospective amendment.

Taxation is one of the most controversial exercises. The people who are affected by the tax laws are always the critics of such laws. They always find the tax laws to be very harsh on them. But for the welfare of the society they are inevitable. However, what the tax payers expect from the Government is stable rules of the game. In a game of sports, if the rules are changed after half the game is over, it would put at least some teams or players at a disadvantage, and those who suffer will always criticize, and rightly so. The foreign investors, who are not accustomed to such retrospective taxation, are very unhappy and angry at such retrospective taxation. The recent issue of applicability of MAT (Minimum Alternate Taxation) to FIIs with retrospective date has led to sharp downfall in the Indian Equity markets due to FII outflows. 

Retrospective amendments to the tax laws may be necessary in some cases where as a result of some unintended drafting error, the exchequer suffers and it results in a windfall gain to the tax payer. But the Government should restrict the retrospective amendments to such situations only. However, in India, in the name of clarificatory amendment, fundamental principles of taxation are amended with retrospective effect. However, such clarificatory amendments should come within the reasonable time of enactment.

But that has not been the case with the Indian laws. Say for example, section 14A which prohibits allowance of expenditure incurred for earning the Income which is exempt from tax was inserted in the Income Tax Act, 1961 with effect from 1^st April, 1962 by the Finance Act of 2001. Ideally, the government should not have taken 40 years to clarify a matter having significant impact.

 The other example is amendment to section 9 of the Income Tax Act, after two landmark decisions of the Supreme Court in the case of Ishikawajima and Vodafone case, which went against the revenue. This is another peculiarity of the Indian taxation that they try to undo the decisions rendered by the Supreme Court or the High Courts, which are against the revenue.  These amendments are made retrospective form a date when such international transactions had not even evolved. How do you convince somebody in such a situation that it was the legislative intent at a time when such transactions were not even heard? And by the way on what basis legislative intent before 50 years is decided by the legislators today?

If you ask any tax expert in India to name a retrospective taxation that has actually benefited the taxpayer, he will have to scratch his head and still will not be able to quote any such piece of law. Why retrospective laws are passed just to benefit the revenue and not the taxpayer? Are there not any drafting errors which harm the taxpayer and therefore requiring to be amended with retrospective date? This probably reveals the psyche of the Indian legislators.

Some of the recent amendments try to upset existing laws or the existing understanding of the laws. It was very well said by the eminent jurist Late Shri Nani Palkhiwala that the only explanation for such action is a “triumph of bureaucratic obstinacy over good sense.”

Such amendments are not only bringing the disrepute to the country but are also nothing but a breach of trust on part of the Government. The global investors today feel so unsafe and uncertain in India that they have sleepless nights even after their tax assessments are over because the government can at anytime change their stand and amend the law retrospectively. The Government should assure safety to the investors. Retrospective taxation is one of the reasons why India is not considered as an investor friendly business destination resulting into poor rank in the index of investor friendliness. Some people have gone to the extent of using the phrase “Tax terrorism” in India.

The need of the hour is to put an end to the retrospective taxation. This tool should be used only on a rare occasion to overcome the drafting errors which results in to a substantial gain to the tax payers. However, such amendment should come immediately upon noticing such errors. The Government should not wait till the tax payer fights tooth and nail till the Supreme Court and after he wins the battle, the government wakes up and amends the law retrospectively. The well settled principles and the understanding of the law should not be amended with retrospective effect. If the Government wants Indian economy to grow at a decent pace, not only a promise but a real action from the government is required on this front.

Our Prime Minister, Shri Narendra Modi has stated publically, that he wants to make India an investor friendly investment destination. For achieving this goal, it is high time that we assure foreign investors that we shall change the laws retrospectively only on a rare occasion.  Our Finance Minister, Arun Jaitely has stated that the right to amend the laws retrospectively is a sovereign right of the parliament, which cannot be taken away. He recently said that “Our Taxation process has to be simpler to increase tax buoyancy. Our taxation policy has to be non-adversarial. The government does not intend to tax people retrospectively”. He has stated that the government is considering forming a panel to deal with tax cases it inherited from the previous administration. But formation of panel may not please the investors and help in any manner in restoring their confidence. The need of the hour is to put an end to such retrospective taxation by bringing suitable amendment.

The last union budget did not contain any retrospective amendments in Direct tax. However, the retrospective actions initiated by the previous government have been allowed to be continued. Ideally, the Government should have halted such actions by bringing a favorable retrospective amendment.  Most of the retrospective laws have not yielded targeted tax collection. It has on the contrary created an adverse impression about the country and its image as investor friendly investment destination.

It is time that other leading political parties also come forward to take a similar vow and help in restoring investors’ confidence.

Let us hope for a brighter tomorrow.