Retrospective tax laws are usually disliked because they throw taxpayers off their existing equilibrium and push them into the disturbing uncertainty of an unpredicted tax liability and a long drawn out litigation.
A recent retrospective amendment that triggered a global controversy was the amendment to the Indian Income-tax Act made in 2012, after the three-member Supreme Court bench decided that the Vodafone group, which was dealing with a capital gains tax liability of $2 billion on its $11 billion acquisition of Indian telecom major Hutch Essar, was not liable to pay tax in India on its acquisition of shares of the latter.
The amendment was made in such a fashion that it becomes applicable to all past cross-border transactions involving an Indian company. The amendment, needless to say, covered the 2007 acquisition of Hutch Essar by Vodafone.
The retrospective amendment can be cited as an example of the government flexing its muscles according to its own whims. But the government too has its raison d’etre for introducing such laws — the larger and long-term interest of the people.
The industry and businessmen have criticised the retrospective laws as they apparently add confusion to the existing tax environment.
The country’s image abroad too gets affected by the introduction of such laws, they argue. This, according to them, further worsens the situation on the ground.
The government, however, can defend its action by taking a position that India can continue to be an attractive global investment destination even if the taxpayer company, in this case Vodafone, pays $2 billion as tax in India on a profit of $10 billion made in 10 years, on an investment of $1 billion.
Please take note of this: If Vodafone does not pay the tax in India on its acquisition of Hutch Essar, the transaction goes untaxed globally, as no other country can levy a tax on the transaction.
Also note that Hutchison International did not pay tax in India or in any other country on the profit they made in India. Therefore, the government too has a defence for introducing such laws.
The government is clearly vested with the right to introduce retrospective tax laws as and when it desires.
Therefore, success is not considered a certainty in any endeavour to challenge a retrospective tax law. It is also true that certain situations may tempt the government to rely on desperate measures to mitigate desperate situation, as it found itself in after the Supreme Court reversed an order of Bombay high court’s division bench reputed for its skill on dealing with tax matters.
The high court’s decision had favoured the income-tax department’s position that it had jurisdiction to bring under its tax net the Vodafone-Hutch Essar transaction.
One must also take into account that a country in which a profit of $10 billion was made on an investment of $1 billion, cannot be construed as adversarial. The case itself was publicity for India as an attractive investment destination as there cannot be many such destinations in the world where profit can be this huge.
However, the government did not do this and eventually found itself defenseless when the apex court decided against it.
Therefore it is easy to understand the spirit behind the introduction of retrospective laws when a tax demand built brick-by-brick by its best officers in a long drawn out exercise that aroused the curiosity of tax regimes world over, was struck down by the apex court. Besides, the method the income-tax department in India has adopted for taxing cross-border transaction was copied by other countries including China, which continues to be one of the busiest global investment destinations.
China issued Circular 698, which ensured that cross-border transaction involving companies in China are taxed in the country. Uganda too followed suit.
Therefore, the government, perhaps rightly believes it was just and fair in demanding tax on a cross-border transaction.
But the government also has an obligation to be seen acting in a just and fair manner, a fundamental principle of good governance.
Any government that resorts to retrospective tax can easily be misunderstood as one that bullies the taxpayers. The government may be protecting its interests by introducing retrospective laws but such laws are indeed counter productive as they invariably send wrong signals to prospective investors who would increasingly view such a regime as one with a penchant to shifting goal post as and when suits it.
It also appears that the judiciary may not have always taken a kind view of the retrospective tax laws. The Gujarat high court last week had to deal with a retrospective tax issue. It was hearing a case in which Niko Resources, Canada was aggrieved by a 2009 amendment in the tax laws that potentially deprived retrospectively, the benefit of deduction entitled to it by the law in existence.
On this issue the court said, “Power of taxation could be used not merely for raising revenue but also to regulate the economy but also to encourage the social objectives of the state.”
“...a bare reading of the provision of the Act or amended Act by which explanation has been added to section 80 IB(9) it is clear that new tax is being levied with retrospective effect, confers arbitrary, unbridled, unrestricted power without recording any reasons and without adhering to the principles of equality as envisaged in Article 14 of the Constitution.”
That the system provides space for multiple opinion is a healthy sign of a thriving democracy. Also that the system has checks and balances in place is another critical factor that would boost the confidence of the prospective investors.
The party that has formed the government at the Centre now had opposed retrospective tax when it was in the opposition. However, why the new regime allowed the tax to continue is a question that is yet to be answered.
But then it is also easy to understand the spirit behind asking for a simpler and straighter system that do not compel the tax payer litigate for years together and waste its executive time that otherwise could be used more creatively.
The media reports suggest that the income-tax department is set to send notices on the basis of retrospective laws made in 2012. In all, 36 notices are in the offing.
It is true that it is not good for the image of the country if cross-border transactions end up in tax litigations for years together. It is also true that the image of the country gets tarnished when companies get away without paying taxes in India.
Therefore, it is high time that all the stakeholders involved in this issue realise the need for an early solution to the problem at hand.
The issue is of multiple dimensions involving India’s image, fiscal justice, fiscal requirements, prospect of investments etc.
Therefore, the picture that looks like a battle between taxpayers and the government is in need of an urgent makeover. The picture will become clearer, better and brighter only if the government and the taxpayer companies affected by the retrospective law, climb down from their respective positions to arrive at a mutually beneficial agreement. They should look for a lasting détente.