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THE INSIGHT

Retrospective Effect In Tax Laws- Non-adversarial Tax Environment
By Abhijit Saha
Aug 10, 2021

RECENTLY there is a sensational news in the media that the government has withdrawn retrospective effect provisions of the Income tax Act. Let's start from the beginning.

Income Tax department demanded capital gain tax on Vodafone on transactions relating to companies with underlying assets in India, although the buyer and the seller may not have any direct presence in India. The matter went up to the Supreme Court which rejected the demand as not legally valid. The government came up with retrospective amendment of the Income Tax Act in 2012 to bypass the Supreme Court decision and impose the demand. This is in respect of the Vodafone's acquisition of 67% share in an Indian telecom company from Hongkong's Hutchison Whampoa. In this case, Vodafone Dutch bought the stake from a company registered in the Cayman Islands, which directly and indirectly held a stake in Hutch Essar in India.

The stake was huge running into billions of dollars. Vodafone moved the International Arbitration Tribunal, Hague, who ordered in favour of Vodafone. Government of India challenged the said verdict at higher level. The position as it stands is that if India loses the case in International Court, then as per International Convention, Indian Government have to pay the entire amount with interest and costs to Vodafone. This was the background. Similar things happened with Cairns who also won the verdict of International Arbitration Tribunal. Government of India is on the backfoot now. 

In this perspective, now, in 2021, the government of India has withdrawn that retrospective amendment brought in 2012. Government is now saying that this gesture will send an unambiguous signal to global firms at a time when global supply chains are being relocated from China. Second, it will go a long way in cementing India's reputation as a reliable jurisdiction.

At an investors meet in the US on April 18, 2015, a participant asked former finance minister, the late Arun Jaitley , "What would you say to an investor who says ' I trust you, I trust the government, but as long as that law remains on the books, how can I be sure that in seven years, or in 10 years or 12, it is not misused by another government, that does not share your intentions"?

So, the question is whether there is any scope for retrospective amendment of the Act which is injurious to trade and commerce and shakes the confidence, commitments and trust of the stakeholders including the global community and detrimental to the equity of the justice systems. Retrospective amendment of tax laws should be banned forever to create a non- adversarial tax environment. Every law should have a certainty. If that certainty of law does not exist, then what is the commitment of the stakeholders including the government to build the economic and social fabrics of the country which is always forever strongly founded on the Pillar of Trust amongst all of us including the government. 

The Hon'ble Supreme Court while rejecting the demand of the Government against Vodafone held:

Tax policy is certainly crucial for the taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal Doctrines like ‘Limitation of Benefits' and ‘Look through' are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand.

In the famous case of Kesavananda Bharati, 13-member bench of the Hon'ble Supreme Court held that the Constitution cannot be so amended by the Legislator so as to violate the Doctrine of Basic Structure. This means there should not be any constitutional amendment which is repugnant to the main principles on which the Constitution is founded and the objects and purpose, which the Constitution promise to serve. Similarly, Hon'ble Supreme Court should suo moto pass an order to meet end of Justice, that there should not be any retrospective amendment of the tax laws to the detriment of the interest of the taxpayers and other stakeholders who have promised and committed to act and do business on the basis of the law of the land prevailing on the date of doing the act by the parties to the contract. This is the only way a country can usher in a non-adversarial tax environment which would instill confidence and trust in the mind of everyone including the foreign and Indian investors. To quote Hon'ble Supreme Court –“ Investors should know where they stand."

[The views expressed are strictly personal.]