The nation is abuzz with the debate over introduction of "GAAR" (general anti-avoidance rule) in tax law. We watched in shock as the government changed the rules of the game with retrospective effect after losing the tax litigation initiated by Vodafone in the highest court of the land. There has been as much volume of literature on the need for government to go beyond the narrow interpretation of tax law, as there has been against the pernicious precedent of a government trying to win a legal battle by crook, rendering the Supreme Court's verdict redundant.
Another incident in industrial India too grabbed the nation's attention. A factory manager at a car plant was reported killed in an attack by workers after an altercation. Rising militancy among workers was spoken of in worried terms. Many advocated "labour law reform" to weaken workers' unions, arguing that India's labour legislation is "antiquated" and rooted in a socialistic era. The workers' union said they were attacked by paid bouncers and were welcomed an investigation into what transpired. Social outrage over a manager dying in the line of duty overwhelmed any trace of empathy for the background to the workers' ire.
Small sections of the media that wrote dispassionately, spoke about workers having been permanently "temporary" (oxymoronic but true in India), a position that can be achieved in full compliance with our labour law. Yet, the demand to dilute our labour laws further is loud and insistent.
These two events may be seemingly unconnected. However, from the point of view of law, there is a deep connect. With GAAR, the government is seeking to introduce a concept hitherto unknown - introduction of maximization of tax collection as a purpose of tax law. With labour law, we have our regulators ignoring a concept well-know: a purposive interpretation and enforcement of beneficial and ameliorative legislation.
Tax laws are aimed at imposing taxes on specific taxable events. Whether an event is a taxable event, is required to be defined. If the ingredients required for rendering an event as a taxable event exist, the applicable rate of tax would apply. If the ingredients are not met, the event would not be a taxable event. Life never fits perfectly into pre-written law. Therefore, when there is a tax dispute, an important principle of interpretation is that it should be "strictly construed" and if two conflicting views are possible, the view in favour of the taxpayer should be adopted. In other words, one has to read the letter of the law and apply it strictly to the facts of the case. Maximizing revenue collection is not the "spirit" or "purpose" of tax law. Therefore, arrangement of one's affairs in a manner that impact of tax would be minimized has been a legitimate right.
With Vodafone, the dispute was over whether transfer of shares of an overseas company specially formed for the purpose of owning an indirect beneficial interest in Indian shares would be a transfer of Indian shares. A high court said the government was right in saying it was a transfer of Indian shares while the Supreme Court "finally" ruled that tax laws should not be read loosely, and held that it was a transfer of overseas shares and not a taxable event in India. Such cases abound worldwide. For example, there have been disputes about whether "potato chips" are "wafers"; whether a cow is "plant and machinery" for a milk farm; and whether a "soap" and "bathing bar" are any different.A commonsensical lay approach would be to say that it is time such "tax fudges" are made impossible. Another perfectly commonsensical approach would be to say that if the government believes that such differentiation is irrelevant, it should not leave any scope for differential treatment of "potato chips" and "wafers" or between "bathing bars" and "soaps". When it finds that life led by its subjects create a remote possibility of such controversy, it could legislate to make its own view known and apply such view prospectively - there is absolute no harm in acknowledging that the law playing catch-up is not a bad thing. If so much clarity can be commanded, there should have been no scope for unpredictable and differential tax treatment for the same event.Settled rules of interpretation of beneficial and ameliorative legislation are diametrically contrary to the rules of interpreting tax law. Such legislation have a stated purpose - for example, securities laws are partly aimed at protecting investors from market abuse; competition law is aimed at fair and proper competition; land acquisition laws are aimed at ensuring due process and fairness in acquiring privately-owned land; and labour law is aimed at protecting workers with weak economic power from abuse by employers. With such law, where two views are possible, the view that furthers the legislative intent and purpose would prevail.
Here is the irony. With GAAR, the government is seeking to interpret tax law like ameliorative legislation to enable aggressive and creative enforcement while with labour laws, the government is standing by and watching their implementation in a narrow and technical manner. While the government would like to call a "bathing bar" a "soap" to maximize revenue, it passively watches "temporary" workers remain permanently so, with the employers being fully compliant with the law. Just the way, the securities regulator sought to intervene with insurance products saying they are mutual funds, if labour enforcers see through permanently temporary employment fudges, precious lives may be saved.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) email@example.com
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