The proposal in the Finance Bill 2012 to amend the Income Tax Act, 1961 retrospectively may shake the confidence of the investors in the policy of the government
The verdict of the Hon’ble Supreme Court of India on Vodafone case had brought a sigh of relief to various overseas investors who invested in the world’s fastest growing economy during its nascence. However, it did not last long as the Finance Bill 2012 has proposed to nullify the decision of the Supreme Court by insertion of explanations under various provisions of the Income Tax Act, 1961, with retrospective effects from April 1, 1962.The memorandum explaining the Finance Bill, 2012 clarifies the reason for the said amendment in the following words:
“Certain judicial pronouncements have created doubts about the scope and purpose of sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there areconflicting decisions of various judicial authorities. Therefore, there is a need to provide clarificatory retrospective amendment to restate the legislative intent in respect of scope and applicability of section 9 and 195 and also to make other clarificatory amendments for providing certainty in law… These amendments will take effect retrospectively from 1st April, 1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years.”
The Government claims that such explanations are only clarificatory and inserted to clarify the intent of the legislature, which the Court has misinterpreted. However the mute questions which are yet to be answered are;
It may be appreciated that the function of the Court is to interpret the statute whenever there is controversy as to the interpretation and giving effect to the intention of the legislature as culminated from the words of the statute. The Court cannot legislate nor can it read the words/phrases/terms which do not exists in the statute. The same is reasonable too, since when the statute is legislated and implemented, it is only the express terms and phrases which are within the approach of the subjects who are bound by such laws. Subjects can understand and abideby only such provisions of the statute which are expressly provided by the legislature in the statute.
The proposed amendment has caused substantial unrest among the foreign investors who have structured their investments in India, based on their consultant’s advice. Though the Court approved such structures under the existing laws (since the legitimate tax planning is permitted), but the Government is keen to tax all such incomes which have even remote nexus with India(by way of retrospective amendments). In fact, the Finance Minister has clarified that the intention of the proposed amendment is just to clarify that India is not a tax heaven and all such transactions should not escape taxation in all jurisdiction.
Notwithstanding the fact that the intent of Finance Minister is noble, such kind of amendments shakes the confidence of foreign investors in the policy and integrity of the government, and creates unrest.
The contention of the Indian Government may benefit revenue generation; however, the same cannot be understood as fair and equitable. Foundation of a sovereign democratic republic is based on the Rule of Law and, its subjects (including the government) are obligated to the laws which are legislated and implemented as such. In case there is any ambiguity under the existing law, then the Court clarifies the same. And, if the government is not agreeable to the decision of the Court then it may bring amendment under the law, to clarify its intention, but such amendment should be prospective in nature. The government also introduces clarifications, to clarify its intent and purpose underlying a particular law. However, the clarifications are in the nature of clarifications till the time they assist in interpretation of existing terms, without extending the scope of the said term.
By the amendments proposed under the Finance Bill 2012, the Finance Ministry has not clarified the terms but actually extended the scope of the statute withoutfollowing the reasonable process of law. This conduct is particularly unacceptable since the amendment has been brought in after the verdict of a Supreme Court which restricted the taxability of Vodafone transaction in India.
If it is seen holistically, then also it seems absurd (since Indian tax laws do not contains such provisions) that when a foreign company transferred its shares in another foreign company outside India, Indian authorities can extend its jurisdiction to tax such transaction, merely because such foreign company(after multiple layers of corporate entities) holds shares in an Indian company, particularly when each corporate entity is a separate legal entity and the principle of separate legal entity is well established principle. Further, the investment has been routed finally through Mauritius, which is an approved route for investment in India, and provides immunity to the ultimate shareholders from the Indian tax laws.
In Vodafone case, shares of Indian entity were held by a Mauritian company; however, the transaction took place for the share of the company incorporated in Cayman Island which holds shares in Mauritian company which in turn holds investment in an Indian company.Since, the transaction was one step above the Mauritian company, therefore, it seems to be more immune from Indian taxation. However, Indian tax authorities did not accede to such contention and issued notice to transferee (i.e., Vodafone) for not withholding tax on such transaction
Is govt. correct in determinedly insisting on taxing vodafone transaction by way of retrospective tax amendments?
The government’s insistence on taxing Vodafone transaction by way retrospective tax amendment, after having lost the matter fairly and squarely before the Supreme Court, is certainly bereft of moral sanction if not legal sanction. In particular, the validation clause in the Finance Bill, 2012, which validates the order pursuant to which demand was raised on Vodafone, notwithstanding the Supreme Court quashing the order, is totally unwarranted, misuse ofexecutive/legislative power, and illadvised.The retrospective amendment to tax Vodafone like transactions, which Supreme Court after a thorough analysis of the provision of law held to not taxable in terms of the provisions of law as stood at the relevant time, would create havoc as it would upset the calculations with reference to which the transactions were entered into by the parties based on their understanding of law, which has been endorsed by the Supreme Court. Who would, for instance, pay/bear the tax levied retroactively? This is certainly not how mature democracies behave.
What may be the implications of this kind of approach on investment climate in the country specifically in the context of stagflating economy?
The retrospective amendments are handiwork of a government suffering from myopia. The founding principles of a robust tax policy, viz., clarity, consistency, continuity, are being sacrificed at the altar of pecuniary benefit. It may be too heavy a price to pay for the loss of credibility as a nation which believes in the rule of law. There would be little incentive to fight a legal battle if you know that the law would be amended retrospectively to nullify the court order, all in the name of legislative intent. If such a feeling gains ground, it would have dangerous portent, for no one would really care forthe law. In my view, the aforesaid amendments would dampen the attractiveness of India as an investment destination. However, it appears that government does not think so and is smug in the belief that foreign investors have little option but to invest in India given that India is not one of the few fast growing economies in the world.
What according to you may be a better approach so that the interests of the revenue and investor community can be harmonized?
Better approach would have been to change the law prospectively so that there was certainty and the foreign investors could plan their transactions accordingly. Also, there is an urgent need for having accountability in the tax administration since wide/sweeping powers without accountability are a sure recipe for abuse, misuse of the power leading to harassment and rampant corruption. Unfortunately, no one is talking about it. This coupled with setting up of fast track courts/tribunals for resolution of the tax disputes involving foreign companies/investors, would go a long way in restoring the fast dwindling confidence of the foreign investor community in the robustness of Indian tax policy, administration and efficiency of dispute resolution mechanism.
The issue of taxability might have been a broader issue to embark upon by the revenue authorities, however, the dispute regarding tax withholding on such transactions, which is contingent to be taxed in India particularly in the absence of any precedent, is not foreseeable.
In the latest development Vodafone has issued notice to the government of India for international arbitration of its tax dispute as the Supreme Court has decided in its favour and subsequent to which the government modified the law. The legal fraternity is enthusiastically following the developments in the case, as it will certainly be a landmark under various provinces of jurisprudence.
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