New tax norms fuelling negative capital formation, says expert

Vinson Kurian Thiruvananthapuram | Updated on November 15, 2017 Published on May 13, 2012

Retrospective tax amendments have fuelled negative gross capital formation, which could adversely affect the growth of the economy.

Mr Sherry Samuel Oommen, a leading tax counsel and tax policy expert, is of the view that the quiver prevailing in the international community is high on this count.


This could potentially open up a Pandora 's Box on tax claims and liabilities in India, Mr Oommen said while addressing a session organised in Kottayam recently.

The southern India chapter of the Institute of Chartered Accounts of India (ICAI) organised the session to discuss amendments in the Finance Bill, 2012.

The Finance Minister has asserted that the proposed tax changes are ‘not substantive' but ‘clarificatory.' They only reiterate the intent of the legislation, Mr Oommen quoted the Minister as saying.

“It emerges that the then government has had the vision to contemplate indirect transfers by non-residents through intermediary jurisdictions. They date back as far as 1961 at a time when India had not liberalised and foreign investments into the country were only a dream,” Mr Oommen said.


One finds it even more surprising that the change is proposed to be effective from 1961, he added. The irony is that India started entering into double taxation avoidance agreements (DTAAs) with neutral jurisdictions only from the 1980s.

The courts have upheld the validity of such amendments which are merely explanatory, declaratory, and clarificatory or curative by nature.

However, a retrospective amendment which brings a change in substantive law by inserting a ‘new levy' has been held to be unconstitutional.

In the present case, Mr Oommen said that considering the government's obdurate stance, it is quite likely that the action would shift to the courts.


Similarly, the need to obtain a tax residency certificate (TRC) in order to avail the beneficial tax treatment under the DTAAs could mean trouble.

Mr Oommen said this could lead to various administrative difficulties as the TRC would need to be obtained before any overseas payment is effected.

On recent rulings of the authority of advance ruling (AAR), he said these have in the recent past created a wave of uncertainty despite a clear legal position in law.


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Published on May 13, 2012
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