Road ahead for retro tax laws
The Financial Express
The Modi government presented its maiden budget within weeks of assuming charge, amidst daunting expectations and aspirations. The budget, which can be rated largely as the most balanced budget of recent times, had only a handful of announcements on tax policy front. The finance minister’s statement that retrospective legislation will be enacted in exceptional situations is encouraging—particularly when seen in the backdrop of the indiscretion with which retrospective legislations have been enacted in successive budgets of the past several years.
From an investor-sentiment standpoint, amendments deeming provisions of the income tax law to tax indirect transfer and (re)define royalties and fees for technical services are labelled as the most regressive by the international investors. The amendment, which can’t be mistaken for anything other than a move to nullify the Supreme Court verdict in Vodafone case, seriously dented foreign investors’ confidence in India’s rule of law. What caused more cynicism and distrust was the indiscretion with which the tax officials sought to implement the new law, in the absence of definitive administrative guidance. While Vodafone pitched for a resolution of the dispute under a bilateral investment treaty, other taxpayers resorted to the Constitutional remedy of writ under Article 226, challenging the Constitutionality of retrospective amendment to tax indirect transfers.
In another retrograde step, the tax administration resorted to an expansive interpretation of retrospective amendment made to definition of ‘international transaction’ (by Finance Act 2012), which resulted in the emergence of several large transfer-pricing disputes in the past 12 months. On the pretext of implementing retrospective amendment, the tax authorities have alleged that the issue of shares by an Indian company to its ‘associated enterprise’ for inadequate consideration is eligible for taxation in India. These disputes have already reached various high courts via multiple writs, though the question of Constitutionality of such retrospective act of legislature remains open for debate. As for definitional aspects on royalties and FTS, several high courts have taken a view that foreign investors could resort to treaty protection and that treaties would override the domestic law.
As a fundamental legislative principle, Parliament has inherent powers to enact laws including those having retrospective effect; however, for it to be Constitutional, retrospective amendments must not result in altering the character of the levy per se, and should not be violative of Article 19 and 14 of the Constitution. Courts have upheld the retrospective application of the legislation where amendments have been found to be declaratory or curative in nature; a substantive amendment to a statute creating a new levy cannot ordinarily be regarded as clarificatory law and ought to be challenged on the ground of Constitutionality.
In the run-up to the 2014 budget, expectations were rife that the new administration shall end ‘tax adventurism’; but the budget didn’t quite score on this count as the finance minister chose not to interfere with the amendments. While the determination of whether or not the amendments are unconstitutional shall now be the prerogative of the courts, the emerging landscape of executive action and interim judicial wisdom is relevant to guide the legislature towards getting an element of equilibrium. The recommendations of the Parthasarathi Shome Committee, to allow prospective application of the amendment, is an extremely important cue for the government and the administration.
Now, a high-level committee has been constituted under the CBDT officials for reviewing fresh ‘taxation of indirect transfers’ disputes. The committee’s ability to remain independent of the tax administration’s pro-revenue stance and pursue a nuanced approach for resolution is key. If the committee takes cognisance of evolving jurisprudence as the Courts proceed on the matter of constitutionality and other definitional aspects of the amendment, it would serve the cause of resolution of the disputes in a seminal manner—for example, the recent ruling of the Delhi High Court in the Moody’s case, in which the Court issued an ‘obiter’ on meaning of the term ‘substantial value’. This is incisive judicial analysis of the key triggers for the levy of indirect transfer tax. It will be regressive, should the high-level committee choose to disregard the key principles articulated by the High Court in administering indirect transfer tax legislation.
I believe that this, perhaps, could be an opportunity for the legislature to take a cue or two from the HC ruling and mount efforts to rationalise the draconian law of 2012. Following the court ruling, nothing should prevent the government from clarifying, by the way of law, certain key aspects of the retrospective amendments, such as the ‘substantial value’ threshold, the exempted categories of transactions such as shares traded on overseas exchange or any form of restructuring. Such hygiene could go a long way in minimising avoidable disputes, while the judiciary forms its view on the question of Constitutional validity of such amendment.
Uncertainty in tax policy and the plethora of tax disputes emerging from retrospective legislations underscore the need for unconventional means of dispute settlement and evolution of alternate dispute resolution (ADR) mechanisms. Vodafone has invoked the India-Netherlands Bilateral Investment Treaty (BIT) that follows the United Nations Commission on International Trade Law (UNCITRAL) rules to settle the dispute through arbitration. Even if the new government agrees to arbitration under BIT, it remains to be seen whether tax disputes stand covered under international arbitration. The dynamic landscape, thus, makes a strong case for the government to consider embracing statutory framework for settlement of tax disputes through arbitration and reconciliation—the two most effective means of ADR internationally.
It is fair to emphasise that the Tax Administration Reforms Commission (TARC), a commission constituted to review the functioning of the tax administration and recommend steps for a taxpayer-friendly administration, has already advocated adoption of ADR. I believe that arbitration and reconciliation can co-exist with traditional ADR forums such as Mutual Agreement Procedure (MAP) and Advance Pricing Agreements (APA), besides strengthening all forms of administrative disputes process under the tax law. It will be imperative for the government to consider the incisive recommendations of TARC and usher in ADR to facilitate speedy resolution of disputes.
Assisted by Sumit Singhania and Rahul Yadav
The author is managing partner, BMR Legal. Views are personal