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Contents
Relevance: Issue of retrospective taxation
Synopsis: The repeal of the retrospective tax decision helps to minimize the risk of authorities taking harmful and unpredictable decisions.
Background
Introduction
- It is hard to grow an economy without individuals and firms taking risk, and for an economy to grow at 7% or 8% annually for several decades the dependency on foreign risk capital is even larger.
- In this context, retrospective taxation laws have hampered the flow of FDI’s and undermined the ability of corporate to take risks.
- Encouraging them to invest more requires such confidence-building steps that the government is committed to reducing uncertainty, and rectifying past errors.
Adverse impact of Retrospective taxation
- Adds to the risks and destroys investment environment: According to experts, changing laws retroactively, spoils the operating environment, and adds to the imagined risks a firm must keep in mind before investing.
- Higher costs: The expected returns from an investment, depends on the cost of capital, which in turn depends on the uncertainty a project or business faces. The higher the uncertainty, the higher the cost.
Positives of curb on Retrospective taxation
- The impact on the flow of investments is likely to be much more significant, as the change signals that retrospective changes will not happen again.
- Often, the capital comes attached with technology and skill transfers, which further helps growth.
- Tax certainty will help to attract enough capital to grow at 7%-8% for decades.
- Growth of Start-ups in India is highly dependent on foreign investments.
Terms to know
