The Hindu Business Line : Iniquitous shopping

DR AMBEDKAR observed, when the Constitution was being framed, that the CAG (Comptroller and Auditor General of India) should be the most important officer under the Constitution. He has a lot of constitutional protection analogous to that enjoyed by Supreme Court judges.

The CAG subscribes to an oath or affirmation, which is the same for the judges of the Supreme Court. He, like the Supreme Court judges, is mandated by the Constitution "to uphold the Constitution of India". The CAG is neither an appraiser nor an adversary. He provides Parliament an opportunity to weigh the executive that is accountable and responsible to it. This institution is a watchdog; it is neither a lap dog nor a hound. It enables the legislature discharge parliamentary functions, as it scrutinises the financial transactions of the Government and brings the results of such scrutiny before the legislature. Therefore, it may not be proper to question the CAG's authority to draw up the Report No 13 of 2005 presented to Parliament.

The report harks back to the JPC report on the stock market scam of 2001which had highlighted the abuse of the Indo-Mauritius tax treaty. This line of thought culminated into the UPA Government's commitment in the Common Minimum Programme to stop the misuse of double taxation agreements. The CAG has not trespassed on the realm of the executive or the judiciary; it has just discharged its constitutional duty by scrutinising the issues emanating from the government's finance from the observation-post of propriety and legality. Hence, no fault can be found with the CAG on this score.

It is incorrect to call the tax treaty an executive treaty as our law recognises no executive treaty. Even a treaty done in exercise of powers under Article 73 of the Constitution is not an executive treaty and must discover its binding authority in some parliamentary legislation, else it cannot have a domestic impact if it causes prejudice to the people of the country, or goes counter to the law of the land. The Indo-Mauritius tax treaty was framed under Article 90 of the Income-tax Act, and it must conform to the statutory preconditions. The Government exercises this power only as a delegate of Parliament. Tax law provisions are surely framed for economic considerations, but are administered on points of legality only. The tax law does not grant the executive an open-ended power to override the law of the land for policy considerations. If a tax treaty is misused it cannot be justified on the ground that it helps getting more of foreign exchange. It is not made for the "de-luxe India" to help them launder their ill-gotten wealth parked outside, or for the benefit of corporate imperium which demands the Government's compliance on their terms.

To say that the misuse of a tax treaty `does not adversely affect citizens' is unfair. This view depends on what view we take of our government and its right to raise taxes. Taxation is no longer the executive-government's esoteric affair. Every misuse of a tax treaty deprives the nation of its resources which government holds on trust. Tainted money parked in tax havens and other sheltered jurisdictions are laundered through treaty shopping. It provides scope for the corrupt and the crook to flourish. It subverts public morality, and eats into the vitals of democracy. It flourishes under an opaque system having lethal effect in every sphere of public life. Then, aren't public concerned that this evil must stop?

An important decision on PIL is an income-tax case decided by the House of Lords in 1981 which was quoted with approval by our Supreme Court in a 1982 decision. It was held that it would be a grave lacuna in our system of public law if a pressure group, like the federation, or even a single public-spirited taxpayer, were prevented by outdated technical rules of locus standi from bringing matter to the attention of the court to vindicate the rule of law and get the unlawful conduct stopped.

It is wrong to say that the Supreme Court, in Azadi Bachao, has upheld the view that the benefits under the tax treaty can be made use of even by FIIs belonging to third-states, popularly known as treaty shoppers who cause wrongful gains to themselves as they do not come within the scope of the treaty.

The court held that treaty shopping is a gross abuse of the tax treaty but desired that this evil be remedied by an executive or Parliamentary Act. The court held it so as in its perception the provision of a remedy was in the legislative domain. It observed: "Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other form, is none of our concern... We are afraid that the weighty recommendations of the Working Group on Non-Resident Taxation are again about what the law ought to be, and a pointer to the Parliament and the Executive for incorporating suitable limitations provisions in the treaty itself or by domestic legislation... In our view, the recommendations of the Working Group of the JPC are intended for Parliament to take appropriate action... "

It is inappropriate to say that no action now is worthwhile as the tax treaty `is anyway limping with the introduction of the Securities Transaction Act'. The argument that the turnover tax is a substitute for a tax on capital gains is absurd. One can see for oneself the inequity of the system by converting the transactional tax base into an income-tax base. We are virtually un-taxing those who should bear tax, more tax.

Stock market is peripheral for the common man, though it is projected as the heart of the country's economy. It is unfair to tax those who toil to survive, but virtually un-tax those who invest to speculate and reap super profits to enrich themselves in other lands. But more important than the tax angle is to prevent the use of the Indo-Mauritius routes by treaty shoppers The ball is now in Parliament's court. It is for Parliament to consider what should be done to prevent the misuse of a tax treaty. The CAG, who has referred to the findings by the JPC, has submitted a comprehensive report. It informs the mind of the legislature. Now what Parliament does is for the world to see. It may be noted that no country has allowed the fraud of treaty shopping: we should not be an ignominious exception.

(The author is Advocate, Supreme Court of India.)

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