Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: ACCOUNTING STANDARD :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: due date for vat payment :: articles on VAT and GST in India :: TAX RATES - GOODS TAXABLE @ 4% :: Central Excise rule to resale the machines to a new company :: form 3cd :: cpt :: VAT RATES :: TDS :: ACCOUNTING STANDARDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: empanelment :: VAT Audit :: list of goods taxed at 4%
 
 
News Headlines »
 Directions under section 119 of the Income-tax Act, 1961
 Securities excluded from GST ambit in revised Bill
 GST dilemma: Hope fades for new tax regime
 5nance.com launches tax investment platform
 Is government tapping your phone?
 Income tax department to use analytics to look for discrepancies in bank accounts
 GST Council fails to break deadlock over indirect tax regime, next meet on Dec 11 and 12 to hammer out differences
 Invoking Writ Jurisdiction For Income Tax Matters
 How to file income-tax returns online
 How Income Tax Returns Are Scrutinised
 All About New Income Disclosure Scheme to make Demonetisation successful

Legislature reinforces source based taxation
May, 14th 2007

Fiscal legislation of nations is not easy to comprehend in situations that entail territorial jurisdiction. Further, where conflict arises, legislation is interpreted inconsistently by interested groups such as the tax administration and tax-payers, leading to judicial intervention. At times, such interpretation is drawn based on differing expectations and perceptions. It is not surprising that cross-border tax matters have become a subject of controversy in the recent past. 
 
One area of recent debate has been taxability of turnkey contracts, where a portion of the contract is executed outside India. In the Ishikawajma-Harima Heavy Industries Ltd case, the Supreme Court ruled that a mere business connection with India may not result in a situation where a non-residents income can be brought to tax in India. 
 
Further, the court held that operations undertaken in taxable territories shall result in taxability of such profits as are reasonably attributable to operations undertaken in the taxable territories. The fact that a contract was signed in India is of no consequence and, therefore, cannot be the sole determinant. Finally, the court held that insofar as taxability of services is concerned, the place from where the services are rendered should determine its taxability. 
 
The taxpayers joy arising from a liberal interpretation given by the Supreme Court was short lived, since the Finance Act of 2007 partially reversed the order by retrospective amendment from April 1976. The amendment waters down the principle of territorial nexus and strengthens source rule insofar as services are concerned. The source rule is now on a par with tax treaties, besides clarifying the true intent of law another instance of the legislature asserting its supremacy over judiciary through constitutionally valid means. 
 
Undoubtedly, the legislature has enormous powers to pass laws, including the power to legislate with retrospective effect. However, the power to enact retrospective law is subject to the parent law, enshrined in the constitution. Article 20 of the Indian constitution restrains the legislature from enacting retrospective amendment in criminal laws. 
 
It is important to assess the implications of retrospective legislation, particularly the ones (in the governments view) that clarify the intent of law, adversely impacting the taxpayers position. The recent amendment being retrospective in application must pass the test of constitutional validity. Besides the argument on constitutionality, there are softer issues such as certainty of law that need to be borne in mind by policy makers. 
 
Governments, ordinarily, should not resort to retrospective legislation for the simple reason that it shakes the confidence level of the tax-payer, besides eroding the stability of the legislation. In the context of India, which will continue to import significant capital for the next few decades, the government should debate if retrospective amendments will unsettle plans and have a negative impact on investment flows. From the governments standpoint, there is limited principle of estoppel applicable on tax legislation and it can go back on its promise, something India would seldom resort to. 
 
Though the Indian constitution does not deny Parliament the power to make laws with extra-territorial operation, the principle of territorial nexus is an internationally accepted principle of taxation. Countries make fiscal assertions over non-residents if they are physically present within geographical boundaries or if there is a real nexus between the income sought to be taxed and the national frontiers. 
 
However, international law does not provide firm guidelines on how such a close nexus should be established. Based on practice, it can be concluded that economic activity is sufficient nexus for taxation purposes. 
 
Following the aforesaid principles, the Indian judiciary has consistently upheld the principle of territorial nexus, while construing tax laws. Established jurisprudence suggests that there must be sufficient territorial nexus between the income and the geographical limits of the state. 
 
As Indias share in cross-border transactions is increasing, tax administrators are anxious that Indias tax base should not get eroded. This phenomenon is leading to new enactments and a series of administrative actions, which suggest a narrow interpretation of law, besides lacking pragmatism and a holistic approach. A case in point is the 2007 Budget amendment, which extends Indian territory to 200 nautical miles, seabed and subsoil under water and airspace above territorial waters. Such extensions will merely lead to unnecessary litigation in the years to come. 
 
How complex our tax legislation can be is anybodys guess. While only time will answer the question, the international tax community is left guessing how strict India will get to enforce its source based rules to expand taxation of economic activities.

Mukesh Butani

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Achievements

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions