Calcutta, March 8: The Narendra Modi-government has often asserted that it doesn't believe in retrospective taxation.

But tax experts believe that finance minister Arun Jaitley's recent budget has baked in a "retrospective element" into a new exit tax clause for entities that may voluntarily decide to give up their status as charitable institutions, which confers hefty tax breaks.

The apparent volte face arises from a new provision in the income tax law which says that if a charitable institution wishes to voluntarily shed that tag, it must pay tax at the maximum marginal rate - currently at 30 per cent - on its accreted income.

The accreted income has been defined as the amount by which the aggregate fair market value of total assets of the trust or institution exceeds the total liability on a specified date. This date could be the day the charitable trust or institution becomes a non-charitable institution.

Citing an instance, tax experts said that a charitable trust could have received an asset many years ago. Over the years, the value of that asset may have grown manifold. By assessing at the current fair market value, it would result in a massive tax liability for the entity that could more than nullify the gains from the tax breaks that the entity had enjoyed in earlier years as a charitable institution.

Explaining the logic behind imposing such a tax, the finance ministry has stated in the explanatory memorandum to the finance bill: a society or a company or a trust or an institution carrying out charitable activity may voluntarily wind up its activities and dissolve or may also merge with other charitable or non charitable institution, or may convert into a non-charitable organisation.

In such a situation, the existing law does not provide any clarity as to how the assets of such charitable institutions shall be dealt with.

"There is a need to ensure that benefit conferred over the years by way of exemption is not misused and to plug the gap in law that allows the charitable trusts having built up corpus/wealth through exemptions being converted into non-charitable organisation, with no tax consequences," the memorandum said.

Tax experts have expressed serious reservations about this move. "In my view, the proposal of exit tax is not only harsh but also highly onerous. The theme of the budget has been to put an end to tax terrorism by simplifying tax procedures and dispute resolution and removing all doubts about retrospective taxation," said N.G. Khaitan, partner Khaitan and Co.

"The Finance Bill 2016 seeks to tax retrospectively the income and assets created out of such income that may have been used for charitable purpose and are still being used for the same," he said.

"Though these amendments will take effect from June 1, 2016, the accreted income of earlier years is also proposed to be taxed. This is tantamount to retrospective taxation," said tax advocate Narayan Jain.

"The government needs to review its policy in respect of the working of the charitable trusts or institutions in India. The fact should be kept in mind that the government effort alone is not enough to meet the enormous necessities of people in practical life. It should act as facilitator in functioning of the trusts and institutions," Jain said.

Retrospective taxation has snowballed into a big issue for foreign investors after Vodafone was slapped with a Rs 11,000-crore tax bill for its acquisition in 2007 of a 67 per cent stake in the telecom entity that was once owned by Hutchison Max.

Vodafone won the case in the Supreme Court that ruled that it was not required to pay tax on an offshore transaction. The UPA government undermined the apex court's verdict by retrospectively changing a 60-year-old tax provision in 2012.

The issue has still not been resolved and has been a big turn off for foreign investors who are troubled by India's unpredictable tax policies.