Advocates regularly plead before the judiciary. This week, with earnest,I am pleading in a non-legalistic fashion before the FM,who represents the legislature, to reexamine 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 every one 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 lens 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.
World has moved and so should India
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 characterizing; 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
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.
The author is chairman of BMR Advisors and views are entirely personal