Unsettling the settled: The growing influence of Legislative Amendments on Judicial Oversight

With India marking its 76th year of adoption and commemoration of the Constitution, one aspect that has remained constant is the democratic framework of India, which was built on the three pillars of governance: the Legislature, the Executive, and the Judiciary. While the Legislature enacts laws and the Judiciary interprets them, recent episodes in tax law, especially under the GST regime, illustrate a growing tension between these pillars. In recent times, there have been instances where legislative actions, often with retrospective effect, have overturned judicial decisions. It raises important questions about the predictability of tax laws and the balance between governance institutions.

The latest triggering point is the proposed amendment in Section 17(5)(d) of the CGST Act, retrospectively replacing “plant or machinery” with “plant and machinery” from July 1, 2017, in Finance Bill, 2025.

In the case of Chief Commissioner of Central Goods and Service Tax & Ors. Vs M/s Safari Retreats Private Limited & Ors. 2024 (10) TMI 286 - SC, the apex court analysed the meaning of plant or machinery used in the statute and held that a “functionality test” should be applied to determine whether the construction of immovable property qualifies as “plant or machinery” for input tax credit (ITC) purposes. Here it is pertinent to highlight that the above issue of ITC on plant or machinery came before High Court of Odisha in the year 2018, that is, just one year after GST came into existence, and thus highlights the relevance of ITC on such capital goods as they form a major chunk of business investment and the ITC as well.

However, after a favourable judgment from the High Court, the order was appealed before the apex court in 2019, and it took almost five years for the apex court to decide the matter on account of its complexity and the involvement of different stakeholders in said matter.  Ultimately, the ruling favoured the taxpayer engaged in constructing a shopping mall intended for leasing, thereby permitting ITC where the building formed an integral part of the business operations. Thus, it gave a sigh of relief to the taxpayers.

However, within three months of the judgment, the GST Council recommended an amendment to Section 17(5)(d) of the CGST Act, retrospectively replacing “plant or machinery” with “plant and machinery” from July 1, 2017, which has now been introduced vide the Finance Bill, 2025. Thus, this legislative intervention reversed the position laid down by the Supreme Court and brought back the legal position to square one.

This raises a key question, that is, whether such retrospective amendment serves a broader policy objective, or does it simply create uncertainty for businesses planning their investments based on established judicial interpretations?

It is noteworthy that this is not the first time that the judiciary has interpreted the tax laws in a certain manner and the same has been effectively nullified due to a legislative amendment.

In 2012, the Supreme Court delivered a landmark ruling in favour of Vodafone International Holdings BV, 2012 (1) TMI 52 - SC, holding that its offshore transaction, specifically the indirect share transfer, was not liable to Indian capital gains tax. Later, the government introduced retrospective amendments to the Income Tax Act, 1961, to treat capital gains earned in an offshore transfer of shares (or interest) in a foreign entity, taxable in India, if such shares (or interest) derive ‘substantial value' from Indian assets. This move, while intended to address perceived gaps in the tax framework, prompts reflection on how such changes impact investor confidence and the predictability of tax obligations.

Historically, Indian courts have differentiated between games of skill and games of chance, with the former recognized as legitimate business activities (refer Gameskraft Technologies Private Limited v. DGGI, 2023 (5) TMI 926 – Karnataka HC). Recently, the GST Council decided to impose a uniform 28 per cent tax on all online gaming and, thus, diminished the line between skill-based games and chance-based games. This has sparked a rift between the taxpayer and the taxman. Stakeholders in the online gaming industry wonder whether this treatment through the meaning given to online gaming in Section 2(80A and 80B) of the CGST Act intends to array the differential treatment under the garb of bringing uniformity in taxes between these two types of games.

The common thread in all the above cases is that it has become a recurrent occurrence that the legislative overrules judicial pronouncements by way of amendments with retrospective effect. While there is no iota of doubt that the legislature has the authority to update laws, such changes must be balanced with the need for legal certainty.  

It is noteworthy that such retrospective amendments, by their nature, can unsettle established legal positions, leading to legal uncertainty.

This, in turn, can adversely impact long-term business planning. In the event of retrospective changes, companies are placed in a precarious position to revise their strategies and potentially face unexpected liabilities.

Further, when laws are applied retrospectively, taxpayers may encounter unforeseen financial obligations that disrupt cash flow and long-term planning.

Further, unpredictable tax policies can deter both domestic and foreign investment, as investors typically seek a stable regulatory environment. Given that attracting Foreign Direct Investment (FDI) is a key pillar of the "Make in India" initiative, a focus which has been reiterated in Budget 2025 and previous budgets as well, such unpredictability could undermine investor confidence and impede the very growth these initiatives aim to promote.

In the above backdrop, in situations where retrospective amendments are made or a ruling is pronounced by the Supreme Court which appears to be against the intention of the legislature, businesses should take a commercial call to take advantage of the same during the intervening time. In certain scenarios, the taxpayer can evaluate whether to take a commercial call to pay under protest to safeguard against potential interest liability in case there is an adverse retrospective amendment thereafter. Additionally, in a scenario where it is the subject matter of input tax credit eligibility, businesses may evaluate whether they should opt to not utilize such credit (wherever possible) till the matter attains finality. Thus, considering the uncertainty owing to such retrospective amendments by the legislature on judicial pronouncements, there is a need for businesses to strategize and evaluate opportunities.

About the authors: Rohini Mukherjee is a Partner and Neha Jain is a Senior Associate at Lakshmikumaran & Sridharan attorneys.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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