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Are Taxpayers Paying the Price of a Turf Battle?
Advocates regularly plead before the judiciary. This week, with earnest, I am pleading in a non-legalistive fashion before the FM, who represents the legislature, to re-examine some of his proposals for enacting retrospective laws.
Sir, we are all aware of the doctrine of 'separation of powers' under the constitutional edifice and its distribution between the legislature, executive and judiciary. I am not questioning the legislature's wide latitude to enact retrospective laws. Neither do we want to debate instances where one of these three pillars sought to usurp each other's bastion.
Amendments, or rethink on intent?
Instances of retrospective amendments in annual finance bills to nullify judicial decisions are not unprecedented; it's the sheer number of over 2 dozen retrospective amendments which has caught everyone unaware. Your proposal to materially overhaul source-based rules for taxation of non-residents has attracted the most adverse form of (domestic and international) publicity in recent times. With regard to taxability of offshore transactions, contrary to the intent theory, the amendments are viewed as a palpable exercise of the government's legislative power aimed to annul the effect of one of the most celebrated rulings of the Apex Court. India and faith in the Indian judiciary were hailed a few months earlier after the Vodafone verdict. Whether we like it or not, the world at large views such moves with prism lenses and judges India against the tenets of principles of justness and fairness. You experienced the unintended consequences of the amendments with last week's experience on FII taxation and the kind of chaos it caused in the markets.
Did we foresee the happenings of the 21st century?
I wonder how the intent of a 1961 law would have been to bring such offshore transactions to tax by simply clarifying the terms such as 'direct & indirect' or 'capital asset in India'? Sir, the same terms were used in the 1922 Act as well. Hypothetically, are we saying that we intended to tax such transactions in 1920s? The 1961 code was an outcome of a committee set up by the then law minister A K Sen, (in 1958) in pursuance to which the central law commission was entrusted the task of drafting the 1961 law and, members included none other than eminent jurist late Nani Palkivala. How I wish, I could have asked him if he intended what is being proposed in 2012. It's fair to conclude that such transactions and their taxability was never envisaged by the most intelligent draftsmen.
The world has moved and so should India
The fact is that tax planning around such transactions is an outcome of globalisation - albeit viewed differently in the post-2008 global crises. Before India opened its markets, several jurisdictions have dealt with challenges of preserving its tax base and such laws with extra territorial applicability. In the process, domestic laws evolved across the globe and so did international conventions which were either embraced by nations or articulated in bilateral tax treaties. It is a widely accepted international tax convention that states exercise their fiscal jurisdiction with respect to persons who have a personal link with that state or to assets with which it has a real or proprietary link. Applying the principles, capital gains are taxed either in the state of residence of the person who made the gain or in the state where the asset is situated. The only exception to that rule (ascribed in most treaties) is disposal of shares, directly or indirectly, of immovable property situated in that state. Such gains are taxed where the immovable property is taxed. It is not my intent to say that such deals should not be taxed because the Court has given a well-reasoned judgment, neither am I arguing that India should not have an anti-avoidance tax law - what I am unable to reconcile is the retrospective nature of several such amendments. It is true that in the past few years, not just India, several other countries (including China) have put forward the view that they are entitled to capital gains tax on such offshore transfers. Business concern has always been if such laws are in conformity with international conventions.
Software, media & telecom not spared
Similar retroactive amendments (from 1976) have been proposed for taxation of software transactions by clarifying definition of 'royalty' to include payment for any right, including right to use a computer software (including granting of a licence - a standard condition when you buy a software). The definition also aims to bring within its ambit all forms of payment for satellite transmission and modern avenues of communication invented in the 21st century. The dichotomy between 'use of copyright' and 'use of copyrighted article' which were resolved by courts in the context of modern information technology law of 2000 is proposed to be annulled. I must confess the legislature had an opportunity to deal with such situations with the evolution of the e-commerce model and explosion of telecom industry. It's international convention that the mode of delivery of goods or services should not alter income characterising; a view subsequently approved by the Indian Courts and aligned to OECD regulations.Such modern transactions will be taxed retroactively since 1976. Sir, it is difficult to explain to domestic and international businesses a rationale for such amendments.
Businesses craving for certainty
The legal view is that retrospective amendments are contrary to the constitutional doctrine of legitimate expectation and reasonableness where it relates back to attach new legal rights and duties on completed transactions. A fundamental reason why such legislations are viewed with suspicion stems from the principle that businesses should be able to plan their conduct with reasonable certainty. The Budget approach exposes several investors to significant tax liabilities for past acts. This adds to the uncertainty factor, which the country can ill afford in the interest of our resolve to be the most attractive market. I trust you will consider all factors keeping in mind competing objectives you are trying to achieve through the Budget exercise.
First published in the Business Standard Column, 2 April 2012