Today's Editorial

Today's Editorial - 20 August 2024

Indian govt has a physics problem—time travelling to change tax laws will hurt business

Relevance: GS Paper II

Why in news:

Recent Supreme Court’s ruling says that states could levy tax on mining companies with retrospective effect from April 2005 onwards.

Background:

  • Concerns have been raised about the government’s repeated attempts at retrospective changes to tax laws.
  • Government earned a lot of plaudits in 2021 for doing away with the infamous retrospective tax provision brought in by the then Finance Minister in 2012.
  • Government has ploughed ahead with several fresh retrospective demands of its own—one of which has been aided by the Supreme Court. 
  • The most recent of these is the Supreme Court’s 14 August ruling saying that states could levy tax on mining companies with retrospective effect from April 2005 onwards. 
    • While this will entail a bounty for state governments like Odisha, it will also impose a massive burden—estimated at about Rs 2 lakh crore—on mining companies.
  • Similarly, the Budget 2024 proposal to do away with the indexation benefit for real estate long-term capital gains arising from sales after 2001 was another such retrospective move. 
    • After very loud backlash, the government rolled this back.

Concerns:

  • There has been inaction at central and state governments level to waive retrospective taxes.
  • In several cases the Indian government and, to an extent, the state governments are remaining at rest even when acted upon by significant external forces.
    • One notable example of this is crypto regulation.
  • Another issue is with the taxation on e-gaming services—which also has a retrospective component.
    • But the crux of the matter is whether the GST Council can impose taxes on e-gaming companies with retrospective effect or not.
    • Budget 2024 brought in a provision agreed upon during a preceding GST Council meeting that allows the central and state governments to waive this retrospective tax amount if they feel it is right to do so. 
    • So far, however, no such decision has been taken by either the Centre or any of the states.
    • Impacts of Government inaction:
      • Smaller e-gaming companies are beginning to operate in the grey market to avoid taxes. 
      • Several bigger ones are moving out of the country, and 
      • International companies previously looking optimistically at India are now pausing their plans to enter the market.\

Conclusion:

There’s a lot the government can learn from the world of physics. First, don’t try jumping back in time. The costs are higher than the reward. Second, don’t let inertia rule your actions, especially when acting quickly can bring security not just to companies but also to India’s citizenry.

Beyond editorial:

About Retrospective tax:

  • A retrospective tax is one that is charged for transactions carried out in the past. 
  • Ideally, retrospective tax is to make adjustments when policies in the past and the present are so vastly different that tax paid before under the old policy could be said to have been less. Retrospective tax could correct that situation by charging tax under the existing policy.
  • Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and deals and charge companies from a time before the date on which the law is passed.
  • Hence, retrospective tax simply means imposing an additional charge of tax via an amendment from a specified date in the past.
  • E.g. -  Retrospective taxes on companies like Cairn and Vodafone

The power of tax authorities in India:

  • The Government of India introduced the Retrospective Taxation System in 2012 by amending the Income Tax Act, 1961 and announcing that the amendments would be in effect retrospectively from 1st April, 1962. 
  • This meant that the Government could now look into previous transactions and demand tax and this decision was based on the Vodafone Tax Case between the Government of India and the British Telecom Major, Vodafone.

Impact of retrospective taxation:

  • Although the Government could now earn a huge amount of revenue in taxes, it tarnished India’s reputation as a place for doing business. 
  • To change a country’s taxation system on a whim has resulted in a decrease of foreign investors in India. 
  • Foreign investors are only ready to invest when the taxation systems are certain. 
  • Retrospective taxation decisions can create uncertainties in the business world.

Suggestions:

  • The retrospective taxation should be avoided as a principle as it creates- 
    • Confusion, 
    • Uncertainty and, 
    • Lack of confidence in a nation’s ability to welcome foreign investments. 
  • Countries across the world such as Brazil, Greece, Mexico, Mozambique, Paraguay, Peru, Venezuela, Romania, Russia, Slovenia and Sweden have prohibited retrospective taxation.

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