Retrospective amendments to tax laws? An ongoing battle
March, 26th 2012
Retrospective amendments pertaining to international tax became controversial with the Supreme Courts judgment in the Ishikawajima case in interpreting the 2007 amendment to Section 9 of the Act, a legal fiction to bring royalties, technical fees for services rendered off shore within the tax net ambit. The Court held that only income from the sources rendered and utilised in India would be taxable under the Act. In retaliation an Explanation was introduced in 2010 to make such income part of the non-residents total income, but this did not go very much further. The High Courts still regard Ishikawajima as good law. Though these amendments relate to income and not capital gains, it is indicative of the Revenues mindset. True, Budgets have to address shortfalls in deficits; hence the widening of the service tax and excise duty ambit, though severe has not generated such outrage as the amendments to Sections 2 and 9 of the Income Tax Act (Act).
The controversy on the retrospective amendment has been generated partly due to two reasons; one is the retrospectivity being effective from the date of inception, the other is the intention of nullifying the Vodafone Supreme Court ruling. The Finance Ministers reported assurances that the amendments are not Vodafone specific, but intended as an enabling provision to protect the nations fiscal interests is not entirely convincing. Assuming its not Vodafone specific, does it imply that the Vodafone assessment will not be reopened, as the litigation has attained finality? Will others get the benefit of the Ruling? The amendments are bound to disincentivise investors who have acted on certain representations and policies of the Government, pursuing investment routes compliant with the foreign exchange regime, tax treaties and applicable laws. Disgruntled investors will seek appropriate reliefs to protect their existing interests, and not just in the Indian courts. Or, they may move on. Against this backdrop, I have this uncomfortable vision of a large section of the Revenue work force engaging in this process, seeking information going back over 50 years, issuing show cause notices, raids, and endless litigation.
On the choice of 1962 for the purpose of retrospectivity, the official response of this being a legal requirement is incorrect, as the Commencement Date of an Act remains unchanged irrespective of amendments; and if retrospective, the dating has to relate back to its coming into force. If it has the effect of opening up liability which had become barred by lapse of time, then Section 149 of the Act which does not permit opening of tax assessments beyond four years, and in certain cases six years, comes into play and the amendment is subjected to the rule of strict construction. There is a provision in the amendment which provides for reopening up to 16 years, so fifty is in any event irrelevant. What defies reason is the haste the Direct Tax Code (DTC) envisages all the changes proposed and gives investors enough time to reorganise themselves without nasty surprises.
The Supreme Court, in the case of National Agriculture Cooperative Federation vs. UOI (2003), relating to discontinuation of exemptions, directed while declining to intervene on the retrospectivity issue, that no decided cases would be reopened. With the dismissal of the Review Petition, Vodafone should be out of the loop on the basis of this precedent. Its unfortunate that the key lessons from the ruling, which is a treatise on offshore tax treatment was not taken benefit of by the law makers. For one, the Chief Justices judgment had applied the Look At test to conclude whether the transaction was intended as a tax evasion tool or a participative one. Hutch and thereafter Vodafone have been regular and high ticket tax payers. The grounds on which the Supreme Court disagreed with the interpretation nature and character test, by the High Court which had held that the rights and entitlements underlying the transaction constituted capital assets, recognising the transaction effectively as a straight forward share sale involving off-shore transfer between two non-residents, which does not attract capital gains tax, is the whole truth, which is unpalatable to the Revenue.
.Justice Radhakrishnans judgment addresses the wider issue of concern which the Government and law makers need to consider, without a jingoistic single point agenda. Taxes will pour in with investments and markets developing / growing. If growth is discouraged, then the taxes will dry up. To facilitate Foreign Direct Investment (FDI), the Government has executed tax and other cooperation treaties with various jurisdictions and removal of trade barriers have contributed to Indias current stature all these involve certain give and takes. Ultimately whether the Judgement remains good law, or the amendments are upheld or struck down will be decided by the Courts.