To tax or not to tax indirect transfers, that is the issue. In the landmark Vodafone case, the Supreme Court ruled in January that there was no provision for such taxation, as the law did not provide for it. The law has since been retrospectively amended in the Finance Act, 2012, to address situations where the transfer of the underlying capital assets situate in India took place overseas between non-residents, hence indirectly.

Much is at stake, including thousands of crores in capitalgains tax. But also under watch is the proper implementation of 'commonly-recognised principles' of taxation, such as levying tax as per the law and not arbitrarily and retrospectively. Now, a draft expert committee report on retrospective amendments on indirect transfers has opined that the changes in the Finance Act have flaws of a technical nature, as the relevant sections in the Income-Tax Act, 1961, have not been amended in tandem.

The panel has called for avoiding fundamental changes in the tax provisions including retrospectivity that seek essentially to widen the tax base. The Centre may want to solicit legal opinion on the comprehensiveness or otherwise of the retrospective changes in the Finance Act, and take a call.

But the committee's core recommendation that retrospective application of tax law as a rule is best avoided seems unexceptionable. In parallel, going forward, we need to set right the apparent lacuna and shortcoming in the law and provide for taxation of indirect transfers and similar Vodafone-like transactions prospectively. For an increasingly globalised economy like ours, we do need to follow global tax practice and formulate and implement commonly-recognised norms and cannons of taxation.

The committee has sought to analyse two related factors relevant to the debate: that of retrospectivity in tax law and indirect transfer. On the former, the panel's report states upfront that retrospective application of the tax law should occur in 'exceptional cases', with the changes carried out mostly to correct mistakes, anomalies and defects.

Retrospectivity is also warranted if there is highly abusive tax planning and avoidance. The report suggests that the big-ticket 2007 Vodafone transaction, conducted via complex offshore structures, was not of the latter variety. In its earlier report on general anti-avoidance rules, the panel has differentiated between tax mitigation measures (which are welcome), avoidance (not so welcome) and evasion (plain illegal).

As for indirect transfers, the report calls for taxation with prospective effect albeit with conditions - that the value of local assets of the foreign company meet a threshold level of its global assets - as such a provision is very much as per international norms.

The suggested prospectivity in the tax law would also be as per the Direct Taxes Code, 2010. It is notable that even when it comes to prospective taxation of indirect transfers, the panel has sought to keep away minor stake sales (up to 26%), or those of corporates listed on stock exchanges - hence presumably heavily-traded - from the purview of levy and taxation.

More important, the panel wants future transactions routed through tax jurisdictions where we have double-taxation avoidance agreements not to be amenable to, say, capital gains tax unless there is specific provision for such tax in India in the relevant tax treaty.

This would defeat the purpose of even prospective taxation here unless we amend the corresponding law in tax treaty regimes like Mauritius.

So, what is averred is that it is not enough to simply amend section 9(1)(i) of the Income-Tax Act, 1961, as has been resorted to in the Finance Act; far from being clarificatory, it would perversely widen the tax base. The report has cited several sections in the law, as it stands, which imply that indirect transfers only provide for taxation of immovable property or preclude foreign currency deals or even outrightly exempt sale of shares of a foreign company.

In hindsight, as soon as UK-based Vodafone bought telecom assets in India, there ought to have been 'exhaustive and transparent' consultations between the revenue authorities here and both the buyer and the seller, in this case, Hutchison based in Hong Kong. And soon after, it could have been par for the course to carry out exhaustive changes in the Income-Tax Act to tax indirect transfers, even retrospectively.

Vodafone is the world's largest service provider and the adverse reactions from investors, including those abroad, have made the Centre chary of implementing the retrospective amendment. We ought not to be so dependent on foreign portfolio investors.

Hence the imperative to bring down the current account deficit and reduce dependence on capital inflows. Also, policy flip-flops, say, in telecom, but generally as well need to be avoided. We can then do without tax sweeteners like no tax on indirect transfers of capital assets so as not to unduly penalise exits.