Let the past be past in tax policy: The cost of retrospective taxes

The recent Supreme Court decision has ruled against online gaming platforms in their dispute with the government over goods and services tax (GST) calculations, and has done so retrospectively. In other words, these platforms would be required to pay higher GST, reportedly amounting to trillions of rupees, on their historical activities. 

There have been, of course, many cases of large retrospective taxation. Examples from the last two decades include the Cairn Energy- and Vodafone-related tax disputes, arising from changes to tax law in 2012 (and their partial reversal in 2021), the telecom adjusted gross revenue case in 2019, the mining royalty case in 2024, and now the online gaming case in 2026. And there have also been large and small instances of retrospective policymaking at the state-government level. These retrospective changes have applied not only to direct and indirect taxes, but also to cesses, fees and royalties.   

The benefits of retrospective taxation are quite obvious. It allows for gaps in taxation policies to be reversed after superior information is available to the government. The revenues so collected can potentially run into many multiples of recent liabilities, because of their retrospective nature. This, therefore, has the potential to make those exploiting loopholes in the system pay up later. A case could, therefore, be made that retrospective policy helps correct inadvertent errors in policymaking. It could also be argued that, if investors know that extraordinarily high returns can be taxed retrospectively, they would be less likely to exploit the loopholes.   

The current decision on online gaming-gambling is a case in point. This is not an activity that creates large employment, not does it serve genuine needs of people. In fact, it’s a highly inequitable business, there is a risk of addiction, and consequently there are risks of deep household-level distress. Therefore, there is some cause to categorise it at the highest tax rate. And in case this was not done at the very outset, it could be argued that doing so retrospectively will send the right message to all such entities intent on exploiting customers and the government for private profit. 

However, the retrospective solution is a double-edged sword, and the other side is sharper and more damaging than the side being used to extract greater revenues. Both in their submissions to the courts as well as in other fora, the Union government functionaries have explicitly acknowledged the serious damage caused due to retrospective taxation.  And, in many cases, the Union government has actively opposed retrospective taxes. This is because the damage is not only to the companies asked to pay retrospectively, but also to those planning new investments.   

The point being made is that the benefit to the government is minor, impacting a narrow space, but the damage to the system is massive and it operates at a systemic level. 

The fact that in multiple areas the courts have ruled in favour of various state governments, public-sector or other government-associated entities collecting taxes retrospectively will require all investors to build in that possibility in their business plans. What’s concerning is that this has occurred multiple times in the past and continues to occur today, and that such taxation can be imposed retrospectively, running back many years, which only increases costs, adds to uncertainties, and consequently reduces project viability. 

It is well known that India’s tax code, regulations, and policy in general are highly complex. The ease of doing business reforms, the decriminalisation efforts, and the reduction in the number of laws have all made impressive dents in the complexity of doing business in India. But it is a vast ocean, and typically the business environment even today requires firms to operate in many domains in the space defined by what is explicitly coded in laws and policies on one side and what is not on the other. This grey space, where what is allowed and what is not allowed is not clear, and many aspects of the day-to-day business are conducted in this manner.   There are multiple entities that firms need to work with — regulators, various ministries and departments, and direct and indirect tax authorities, both at the central and state levels. And in each of these interactions, there are multiple areas of ambiguity. The situation for the investor is, therefore, not very different from that of a customer in a restaurant who orders food blind and knows the bill amount only after consuming the food. 

All kinds of investments are impacted, large and small, global and national, and direct and portfolio.  In such conditions, economic theory predicts a market failure marked by lower investments and, perversely, greater likelihood of more risky projects being taken up.   

One can pin one’s hope on the judiciary to give a fair decision. However, the judiciary will not be able to support the investor because both the prevailing law and case law allow retrospective taxation policies.  The laws that limit retrospective policy are limited to criminal areas and indirect taxation before 2012.  There are many areas, including cesses, royalties, fees and even direct taxes, where such possibilities remain.  

And the systemic damage is quite massive. It is well known that corporate sector investments have not really taken off after 2012.  It is also well known that foreign direct investment (FDI) has been falling relative to gross domestic product (GDP) since 2021. India has had impressive GDP growth, controlled inflation, good macroeconomic management, a striking infrastructure build-up during this period.  Yet both domestic and international investor response has been lukewarm. It is also clear that where hard economic data is concerned, nothing explains the lacklustre private-sector investment figures.  The possibility of retrospective action by some part of the government at some point in the future, going back many years, can lead many businesses and entrepreneurs to bankruptcy. 

What should the government do?  Retrospective policy can be imposed by any part of the government, and, therefore, India needs a comprehensive legal solution where all parts of the government are prevented from demanding retrospective payments.  Such a law should allow some flexibilities, but the current regime, which allows any part of the government to have complete freedom to go back as many years as it deems fit, needs to be curtailed. India has allowed black money amnesty schemes on multiple occasions and with no political-economic backlash. Why not consider an explicit loophole-amnesty mechanism where all parts of the government leave the past alone?

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The author heads CSEP. The views are personal