Yahoo Finance What is retrospective taxation?
The concept of retrospective taxation has gained popularity in recent years, at least in India, thanks to the Income Tax Department's introduction of tax amendments. As the name suggests, this type of tax is directed towards income earned in the past. Read on to understand retrospective taxation.
Meaning of retrospective tax
To better understand this concept, breaking down the two words will be helpful. The term retrospective means to look back on something that has occurred in the past. A tax is anything that you pay over and above the base price of a good or service to the government. So, the term retrospective tax means to pay tax for goods and services purchased in the past or income earned in the past. This may happen due to laws being amended or new rules of taxation being introduced in an economy.
Example
Consider this scenario to better understand retrospective taxation:
For the financial year 2019-20, you had paid taxes at the rate of (x-5)%, whereas the taxation rate, for 2020-21, is x%. For some reason, like a slump in the economy or the COVID-19 pandemic, the Income Tax Department proposes to levy the same tax rate of x% on the previous financial year 2019-20 for the economy to recover from the shock.
What does it mean for you? In real terms, you will have to pay a retrospective tax at the rate of x%, which may be more than the taxes you have already paid. This is called the system of retrospective taxation.
The rationale for retrospective tax
The system of retrospective taxation may be criticised for numerous reasons. You may contest the payment of extra taxes for your business when you have already paid your dues to the government. However, there is a clear logic and rationale to why governments may decide to impose such a taxation system. A retrospective tax is usually caveated with a validation clause. It helps validate the demand for a retrospective tax payment made by one party and the decision or order passed by the country's concerned tax authority.
For example, the Supreme Court of India clearly states that you cannot add a new tax liability in retrospect. That is why it is accompanied by the validation clause that serves to verify the demand and pass a judgment.
Conclusion
Retrospective taxation refers to levying of taxes on goods and services already purchased or income already earned. The government can implement this system for many reasons and is usually accompanied by a validation clause.
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