BACK TO THE FUTURE: RETROSPECTIVE TAX AMENDMENTS
INTRODUCTION
“A statute is to be deemed to be retrospective, which takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already past.”
Gene General rule rul e “Nova Constitutio Futuris Formam Imponere Debet Non Praeteritis” a new law ought to
regulate what is to follow, not the past Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation or imposes a new duty, or attaches a new disability in respect of transactions already past, must be presumed to be intended not to have a retrospective effect.1 An ex post facto law is a law that retroactively changes the legal consequences (or status) of actions committed or relationships that existed prior to the enactment of the law. Without using the exact expression “ex “ ex po st facto law”, the Indian Constitution prohibits the
legislation of such laws under Article 20(1). It is however permitted in the United Kingdom where Parliament supremacy is paramount in the governance of the country. This, however, applies only to criminal law.
Tax Tax Statutes “Tax Statutes may be retrospective if the legislature clearly so intends” -Sutherland
The generally accepted system that transcends all systems of taxation across the world is that a tax payer must be aware of the tax which he is expected to pay. Therefore, taxing statutes are usually prospective so as to enable the tax payer to weigh the benefits of the transactions which he intends to enter into. However, taxation laws can also be made to legislate retrospectively and cannot be invalidated simply on the ground that it is retrospective in
1
Amireddi Raja Gopala Rao v. Amireddi Sitharamamma 1965 (3) SCR 122.
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operation. In such cases, the reasonableness of each retroactive tax statute will depend on the circumstances of each case and if the retrospective feature of a law is arbitrary and burdensome, the statue will not be sustained. Imposition of tax by legislation makes the subjects pay taxes. It is well-recognised that tax may be imposed retrospectively. It is also well-settled that by itself would not be unreasonable restriction on the right to carry on business.2 NECESSITY FOR TAX AMENDMENTS
It is necessary that the legislature should be able to cure inadvertent defects in statutes or their administration by making what has been aptly called 'small repairs'. Moreover, the individual who claims that a vested right has arisen from the defect is seeking a windfall since had the legislature's or administrator's action had the effect it was intended to and could have had, no such right would have arisen. Thus, the interest in the retroactive curing of such a defect in the administration of government outweighs the individual's interest in benefiting from the defect. The Court has been extremely reluctant to over- ride the legislative judgment as to the necessity for retrospective taxation, not only because of the paramount governmental interest in obtaining adequate revenues, but also because taxes are not in the nature of a penalty or a contractual obligation but rather a means of apportioning the costs of government amount those who benefit from it.3 NATURE
Tax amendments which are explanatory, declaratory, curative or clarificatory in nature are retrospective in effect even if they are not expressly made retrospective. In the eyes of the law, such amendments simply explain the law and do not change the law as such.4 CONSTITUTIONAL VALIDITY
Taxing power is neither incidental now subsidiary to the power to legislate on a matter or topic. It can be derived only from a specific entry in the legislative list.5 The Income Tax Act 1961 lies within the legislative competence of the Parliament.6
2
In Empire Industries Limited & Ors. Etc. v. Union of India & Ors. E tc., [1985] 1 Supp. 292 at 327; In Empire Industries Limited v. Union of India [1985] l Supp. 292 @ 327. 4 Allied Motors (P) Ltd. v. CIT (1997) 3 SCC 472; CIT v. India Steamship 196 ITR 917. 5 Synthetics & Chemicals Ltd. v. State of U.P., (1990) 1 SCC 109. 6 Union of India v. M.V. Valliapan (1999) 6 SCC 259. 3
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The power of the Legislatures to make laws is conferred by Articles 245, 246 and 248, and includes power to give it a retrospective effect.7 It includes giving retrospective effect to taking laws as well.8 It is also competent for the legislature to repeal 9 or amend 10 an act retrospectively. Certain requirements need to be fulfilled in order for the legislature to introduce enactments for the first time or to amend the enacted law with retrospective effect. It is not only subject to legislative competence but also several other judicially recognized limitations.11
The words used must expressly provide or clearly imply retrospective operation
The retrospectivity must be reasonable12 and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional
The power cannot be used to subvert a judicial decision without removing the statutory basis of the decision.
In testing whether a retrospective imposition of a tax operates so harshly as to violate fundamental rights under Article 19(1) (g), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of taxing statute struck-down by courts for certain defects; the period of such retroactivity, and the degree and extent of any unforeseen or unforeseeable financial burden imposed for the past period etc.13 SEPARATION OF POWERS
The doctrine of separation of powers implies that each pillar of democracy – the executive, legislature and the judiciary – perform separate functions and act as separate entities. The doctrine is a part of the basic structure of the Indian Constitution14 even though it is not specifically mentioned in its text.
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M.P.V. Sundararamier & Co. v. State of A.P., (1958) SCR 1422; J.K. Jute Mills v. State of U.P., AIR 1961 SC 1534; Jadao Bahuji v. Muncipal Committee, Khandwa AIR 1961 SC 1486; Govt. of A.P v. Hindustan Machine Tolls Ltd., AIR 1975 SC 2037; Nandumal Girdhari Lal v. State of U.P., AIR 1992 SC 2084. 8 Union of India v. Madangopal Kabra (1954) SCR 541; Jawaharmal v. State of Rajasthan AIR 1966 SC 764; Tata Iron & Steel Co. Ltd. v. State of Bihar (1958) SCR 1355; Gouse D.G. v. State of Kerala AIR 1980 SC 271; Shetkari Sahakari Sakhar Karkhana Ltd. v. Collector of Sangli AIR 1979 SC 1972. 9 S.S. Bola v. B.D. Sardana (1997) 8 SCC 522. 10 Indira Nehru Gandhi v. Raj Narain AIR 1975 SC 2299. 11 National Agricultural v. Union of India , (2003) 181 CTR (SC) 1. 12 Javed v. State of Haryana (2003) 8 SCC 369. 13 M/s Ujagar Prints & Others v UOI (1989) 3 SCC 488. 14 Keshavananda Bharti vs. State of Kerala AIR 1973 SC 1461.
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Under our Constitution, the judiciary has been assigned the function of interpreting laws made by Parliament. In any dispute, the Union or state governments and the tax payers are adversarial parties and the judgment can be in favour of only one of them. It would be grossly improper to overrule every verdict in favour of the taxpayer. It is well settled that the legislature cannot by bare declaration, without anything more, directly overrule, reverse or override a judicial decision. However it can, in exercise of the plenary powers conferred upon it by Articles 245 and 246 of the Constitution, render a judicial decision ineffective by enacting a valid law fundamentally altering or changing the conditions on which such a decision is based. Such law can also be given retrospective effect
with a deeming date or with effect from a particular date. This is done by means of a validating legislation15 which is of particular significance and utility and is quite often applied, in taxing statutes. It is necessary that the legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and seek a windfall from the legislature‟s mistakes. Validity of legislations
retroactively curing defects in taxing statutes is well recognized and courts, except under extraordinary circumstances, would be reluctant to override the legislative judgment as to the need for and wisdom of the retrospective legislation.16 EXAMPLES
The Gujarat HC, in Manubhai A. Sheth and Others vs. ITO (1981) 128 ITR 87 , held that “Profits or gains on sale of agricultural land would be „revenue‟ within the
meaning of s. 2(1)(a) and hence not liable to capital gains. To nullify the said decision, Explanation 1 was inserted by the Finance Act, 1989 with retrospective effect from 1-4-1970 declaring that revenue derive from land shall not include and shall be deemed never to have included any income arising from the transfer of any agricultural land.
Collector of Central Excise, Baroda v. Cotspun Ltd. 1999 AIR SCW 4291 -
Manufacturers had to file classification lists to sort out their goods and pay the applicable excise duty which were then approved by the department. In 1999, a five judge bench of the Supreme Court held that once a classification list had been approved, the department could not demand duty for past periods on the ground that 15
Saksena v. State of M.P. AIR 1976 SC 2250. M/s Ujagar Prints & Others vs UOI (1989) 3 SCC 488.
16
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there was a “short levy” of duty. This judgment was rendered in 1999 and the
Finance Act 2000 amended the law retrospectively from 1980 and nullified this decision.
CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 :- The Supreme Court held that if
any asset which was held as investment and is subsequently converted into stock-intrade of the business, the assessee‟s assessable profits on such sale was the difference
between the sale price and the market price prevailing on the date when converted and not the difference between the sale price and the price at which such asset was originally purchased by the assessee. To nullify the said decision and to tax the difference in between the sale price and the cost, sub-sec (2) in sec. 45 was inserted whereby the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration and assessed accordingly.
F inance Bill 2012 and the Vodafone J udgement The Finance Bill 2012 has made several retrospective amendments with effect from April 1, 1962 (50 years earlier!) Apart from Vodafone, other decisions in favour of assessees have also been effectively overruled. The competence of the legislature to enact or amend the law with retrospective effect is not in doubt but exercise of such power was rare. It used to be an exception rather than the rule. Unfortunately, nullifying every adverse judgment given each year by the Supreme Court, high courts and even the tribunals in the succeeding budget has become the norm. In this Union Budget the finance minister has introduced three tax measures with retrospective effect. One is regarding the sale of assets with control outside India. The second measure is the government‟s treatment of software sales by a multinational as royalty income
rather than business income. And the third is that the transfer pricing norms between a foreign subsidiary and its parent have been clarified on the higher side. The biggest fallout of all the three retrospective steps is expected to be felt on Vodafone, the $67-billion telecommunications giant. In January, the Supreme Court had decided in favour of Vodafone in the ongoing tussle regarding payment of dues wherein the UK Company was slapped with a $2.6 billion notice for non-payment of taxes on purchase of a 67 percent stake in Indian mobile operator Page | 5
Hutchison Essar. The Supreme Court held that the Government has no jurisdiction over Vodafone‟s purchase of mobile assets in India as the transaction took place in Cayman
Islands and Indian authorities have no jurisdiction over transactions, which have taken place outside the country. However, this amendment seems to have now overruled the decision of the Supreme Court and will now have implications not only on the Vodafone decision which won the Rs 11,000crore tax dispute case against tax authorities in the Supreme Court but also on all other cross border transactions involving „indirect transfers of shares‟ which have derived value
substantially from assets located in India. Instead of dealing with the problem in a rational way and adopting the model already put in place by other Countries, India had proposed a “wholesale” retrospective change in the law.
In its haste and obsession to nail Vodafone, the Government had not paused to consider that the proposed amendment that a shareholders‟ agreement would be an “asset/ property” would
be in conflict with the prevailing Company law and contract law, as interpreted by the Supreme Court17, that a shareholders‟ agreement did not give enforceable rights against the company. The Finance Ministry officials have given following clarifications putting across the various reasons for bringing out these retrospective amendments:
Retrospective amendment seeks to make intention of legislature clear of what according to legislature, the actual interpretation of the tax laws is. The retrospective amendment therefore clarifies that such transactions were always subject to income tax.
Such amendment now rather provides certainty that offshore transactions were always susceptible to income tax.
If clarificatory retrospective arrangement is to be made, it will be with reference to the date of enactment. intentions of the legislature can not have any other reference point than the date of enactment
The Vodafone case is not a case of double taxation; it is a situation where no tax has been paid on such sale anywhere. It is not desirable that such capital gains not be taxed anywhere in the world.
17
Rangaraj vs Gopalakrishnan AIR 1992 SC 453.
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Even on equity, Vodafone and similar cases have huge tax impact, therefore when one considers a rough aggregate estimate of Rs. 35,000-40,000 crore, this fact cannot be ignored.
Such retrospective amendment would not have any impact on foreign direct investment. The example of China was cited to explain that indirect transfers which are taxed in China have not impacted its FDI.
The retrospective amendment shall work in the framework of law, where cases would be reopen, if felt necessary, within the given statutory period of past 6 (six) assessment year(s) only.
Lastly, every year the budget does envisage situation where retrospective amendments do take place to clarify the intention of legislature where the interpretation given by courts is contrary to the purported legislative intent.
Criticism of these amendments:
The retrospective amendments uses the words, “for the removal of doubts” and
thereby adds insult to the injury caused to the judicial system as it questions the interpretation of law given by the highest court.
The government may be able to collect the revenue by making such retrospective amendment but it may have a far reaching adverse effect on the Indian economy in as much the foreign investors may pull out from Indian market and the adverse effect would be much more than the collection of tax.
International investors look for stability and predictability in a country‟s actions. This one action of the Budget will force investors to look for safer countries for investments where there is certainty in law and tax practice. It is therefore a retrograde step and will adversely affect the Indian economy in the coming years
It brings out the lack of vision of the present leaders in power. The government has chosen to not only send a signal to the world that India has no rule of law as it can overturn judgments of the Supreme Court of India by bringing in retrospective amendments but they have chosen to do so when the Indian economy desperately needs capital infusion, particularly foreign direct investment.
The amendments therefore appear to be a shortsighted measure for a short-term gain and loses sight of the long-term implication of such an amendment, the amendment has undone, the picture that India has been trying to project for the last few years in Page | 7
global economic forums of being a mature democracy having a matured and visionary political class and a mature judicial system which has the power to implement rule of law.
CONCLUSION
Under Dicey‟s analysis, the function of the judges is loyally to give effect to the intentions of
the Parliament. They are the handmaidens of Parliament, expounding, explaining and giving effect to the statutes that come before them.18 Therefore, the constraints that are placed upon the Parliament are merely political, not legal. India follows a system of Parliamentary democracy which has been adopted from the system of governance in the United Kingdom. The Constitution also confers upon the Legislature the power to legislate laws under Article 245 and 246. But no organ of the government can be given absolute independence and power and therefore, certain checks and balances do exist. The Constitution of India dons the role of that guide which ensures that no organ exceeds the scope of its powers. The Supreme Court has held in a wide range of cases that retrospective tax amendments do not infringe upon Article 19 of the Constitution and therefore, lays no restriction of the freedom of trade and commerce. Therefore, such amendments are not unconstitutional and within the power of the Parliament. However, those were the days when retrospective amendments were rare and of a smaller magnitude. In the present moolah age where money serves as a determinant of a government‟s prosperity, the Supreme Court will cease to be seen as a deterrent to the abuse of power by one organ of the government. At the time when the Economic Survey talks of need of cushion of foreign reserves, this retrospective amendment will send wrong signals to the foreign investor community.19 Such retrospective amendments are an insult to the judiciary and strike a mortal blow to the principle of separation of powers. They also destroy the essential principles of clarity, certainty and stability that must exist not only in tax laws but in any civilised democracy where the rule of law prevails. Article 141 clearly states that the law declared by the Supreme Court shall be binding on all courts within the territory of India and therefore, by virtue of it, becomes the law of the land. In a system where the Judiciary has been the assigned the role of 18
British Railways Board v. Pickin [1974] AC 765. M Lakshminarayanan, National Head - Tax and Partner, Deloitte Haskins & Sells.
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interpreting the Constitution, the Legislature cannot rely upon the excuse that they seek to only clarify such laws. The doctrine of separation of powers is not codified in the Indian constitution. Indeed, it may be difficult to draw a strict line demarcating the separation. However, it may be necessary for each pillar of the State to evolve a healthy convention that respects the domain of the others. The fundamental principle that must be borne in mind is that what is directly forbidden cannot be indirectly achieved. However, such practices not only make the future uncertain, but also the past bleak.
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