Retrospective application of Taxation laws

Article submitted by Yazhini, SASTRA Deemed to be University.

“Every government has a right to levy taxes. But no government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made a victim of palpable injustice.”[i]

-Nani Palkhivala

Introduction:

The Ministry of Finance prepares the budget for each year with the tax-related alterations. The performance of the previous year will be discussed along with the financial plans on direct and indirect taxes and revenue collection Sometimes the tax laws are amended to keep up with the ongoing developments and for the welfare of the taxpayers. The amending powers are left with the union and state legislature. The change in the laws is to disengage some of the decisions of the judicial bodies which are against the legislative intent.

Types of amendments:

There are two types of amendments – prospective and retrospective.

1. The prospective amendment is the change that is to be enacted in the future, i.e., changes that are to be taken into effect in the future either from the date of enactment of the law or any future date It is easily acceptable with promising developments in the existing law.

2. The retrospective amendment is a change that will take effect from a date in the past. i.e., a specified law is applicable from a date from the past and not the future. Generally, these amendments create confusion and the acceptance will not be easy.

Retrospective tax:

It is about the accumulation of additional levy of tax on any specified transaction by an amendment. For example, the addition levy of tax on indirect transfers by the Finance Act, 2012 retrospectively from 1961. Normally, the retrospective taxes are not welcomed by the taxpayers because it creates new disturbances in the pre-planned budget design.

The amendment in the tax laws are based on two circumstances,

· Amending the existing laws which are discriminatory in nature or against the legislative intent

· To provide a law that benefits the taxpayers or to reduce the burden and harshness of the existing law.

An amendment can be acquainted with different forms. Either by introducing a new piece of legislation overriding an already existing law or by using a judicial precedent.

Growth in the economy stirred the disputes in taxation laws and complications began. The first retrospective tax law was enacted in the year 1951 in the case of Chota Bhai v. Union of India[ii], where an imposed duty on already manufactured tobacco was brought into force retrospectively from the date of introduction of the bill as opposed to the date on which the law came into force. A retrospective amendment cannot kill the existing law but the same can repair the drawbacks.

The validity of retrospective tax:

In the earlier stages, the Supreme Court of India faced difficulties in deciding the constitutional validity of retrospective amendments. As mentioned earlier, the acceptance of these taxes is not easily welcomed by the taxpayers. Proving the validity of the amendment is very important and the validity is shown only when the case is to cure the advert defects in the existing law. However, the retrospective tax does not itself become unreasonable. As the court said, "a court's decision must always bind unless the conditions on which it is based are so fundamentally altered that the decision could not have been given in the altered circumstances”[iii]. The language used should be very clear because the intended meaning said by the parliament has to be understood by the courts, and the reasonableness of retrospective application will be examined. If the literal reading of the retrospectivity provided by the parliament, read with the provision, is absurd, then it would be considered illegal. The reasonableness of the tax provision will be analyzed based on the facts and circumstances on which the amendment is constructed. If the amendment failed to cure the said inadvertency, it would be declared unconstitutional. And if the amendment fulfills its purpose of retrospectivity, its constitutionality will be sustained by the legislature.

The Vodafone case:

The Vodafone International Holdings BV v. Union of India[iv] is one of the landmark cases that shook the retrospective taxation law`s history. The telephone companies in India have their top success stories since its emergence from the year 1996. It was one of the major infrastructure sectors in foreign investments. Hutchison, a Hong Kong company entered India and invested along with its domestic partner. When Hutch decided to exit India, Vodafone bought the Cayman Islands-based company with Indian shares (Hutch) by proper acquisition. All the money transfer, property exchange, and documentation took place outside India. The companies were aware that India cannot obtain tax gain from the capital assets that are outside the Indian jurisdiction. The Income Tax Act, 1961 said that the transaction in question cannot be taxed, and consequent to this judgment the Income Tax Act retrospectively amended stating that the transaction in question could be subjected to tax within India. the company was asked to pay Rs.11,000 crores of capital gain tax. The judgment harmed foreign investment and it faced a major backlash.

Difficulties faced:

Retrospective taxation is hard on both the government and the taxpayers. A major change in taxation drags the flow of money backward and the people are left with hefty tax burdens. To cope up with the heavy taxation, the organization or a businessman will increase product prices. As a result, the service class will demand high remuneration. The difficult part is that the labour class is left with nothing and they suffer the maximum. The ongoing contracts and agreements get affected. It will be hard to accommodate an extra levy in both domestic and international transactions. When the taxation change is applied to the direct tax, the chances of blow-up are limited because the recovery is easy as the charge is applied to the principal taxpayer. So far as the indirect taxes are concerned, it becomes difficult as the recovery is made from a subsequent party. Unless the reason behind retrospective taxation is clearly significant, it affects the whole economy.

Recent trends:

The earlier times, retrospective amendments were used to cure the defect and make a change in the law which condemned the legislative nature. But the recent times have changed because the rationalization of indirect, direct taxes and corporate taxes have become a large source of revenue. India is witnessing a huge growth in the foreign direct investment due to which the contemplation regarding the surety of changes that if it is clarificatory or retrospective has arisen. Clarification is just amplifying the doubts in the law and it is not be considered as a retrospective amendment. The Supreme Court had said that in the case of Union of India v. Martin Lottery[v], the legislative assertion is that clarification is just the removal of doubt and it not conclusive as being retrospective.

Conclusion:

The retrospective amendment is just the reiteration that the Indian legislature has a long way to change its old approach but, in this case, the consequence of the retrospective taxation upsets the financial structure previously planned by of an assessee. To sum up, there is no fixed formulation for the retrospective taxation in amendments, so the courts have to ensure the probability of the negative outcomes due to the applicability of the amendment and the retrospective view should be less in the tax arena.

[i] Kanga & Palkhivala, The Law and Practice of Income Tax, ix (Dinesh Vyas ed., 2004) [ii] AIR 1962 SC 1006 [iii] Prithvi Cottons case, 1969 2 SCC 283 [iv] 2009 (4) Bom CR 258 [v] 2009 12 SCC 209