GST Council Should Reject Retrospective Taxation Proposal Outright

The Goods and Services Tax (GST) Council must emphatically reject the proposal to retrospectively amend the Central Goods and Services Tax (CGST) Act and overturn the Supreme Court’s recent verdict in the Safari Retreats case. It should also disallow the proposal to retrospectively impose a five per cent levy on the delivery charges claimed by platforms like Zomato and Swiggy.

These proposals are not only unjust but also tarnish India’s image worldwide and hurt its economic interests. For one thing, retrospective taxation undermines the basic principles of fairness and legal certainty. Businesses plan their operations, investments, and compliance based on the existing legal framework. Altering tax rules retroactively disrupts these plans and creates an environment of unpredictability. Such measures erode trust in the rule of law, a cornerstone for a stable business environment.

The Safari Retreats case is a critical example. The Supreme Court allowed input tax credit (ITC) for GST paid on goods and services used for constructing commercial properties that are later leased out. This judgment provided much-needed clarity and relief to businesses in the real estate sector, which is already burdened with many challenges.

Reversing this decision through a retrospective amendment will not only nullify the relief but also penalise businesses that acted under the prevailing legal interpretation. The ‘aggrieved’ government can urge the apex court to review its decision, which is not unprecedented. It happened earlier this year in a case involving Delhi Metro Rail Corporation and Reliance Infrastructure’s metro arm, Delhi Airport Metro Express Private Limited. But a government overturning the decision of its own apex court sends across bad vibes.

Further, India’s experience with retrospective taxation in cases involving Vodafone and Cairn Energy is a stark reminder of the adverse consequences of such policies. In 2012, the government amended tax laws retrospectively to impose tax liabilities on Vodafone’s acquisition of Hutchison Essar and Cairn Energy’s internal restructuring. These measures led to prolonged legal battles, significant reputational damage and arbitration losses for India. Eventually, the government was compelled to scrap retrospective taxation in 2021, acknowledging its detrimental impact on investor confidence and the ease of doing business.

Alas, it has not been very successful. The 2012 decision not only deterred foreign investors at that time; they are still wary of putting their money in India, for an unpredictable and risky environment is an unsound proposition for any business. Hence, moves to reintroduce retrospective amendments, even in a different context, risks reopening these wounds and undoing the progress made in restoring the country’s global reputation. The proposal to retrospectively tax digital platforms would be no less damaging.

We have had a number of digital start-ups that did great only to collapse later due to varied factors. The few start-ups that have survived the tide and are making profits should be spared from the vagaries of economic policy. Besides, the government should acknowledge the fact that digital start-ups are creating jobs at a time when unemployment is a big problem.

The GST Council must recognize the long-term damage that retrospective taxation can cause. Instead of pursuing such amendments, the government should focus on creating a stable tax regime. It must respect judicial decisions, address the genuine concerns of stakeholders and refrain from measures that erode trust.