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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.
- In both the cases, India lost to private firms and at the end lost both ways:
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
