Tax bygones be gone

| Updated on March 12, 2018 Published on October 10, 2012

The Shome panel’s arguments against retrospective taxation will restore sagging investor confidence, helping reverse the trend of forex outflows in the first quarter.

By recommending that retrospective amendments to tax laws be carried out only in “exceptional” instances, the Parthasarathi Shome Expert Committee has made a strong case for a benign approach to taxation in situations where the law renders itself to more than one interpretation. Any retrospective amendment, given the fact that the original drafting lends itself to duality of interpretations, carries with it an element of surprise from a taxpayer’s perspective. This is so even if the line of reasoning adopted has sprung from a manifest error of drafting of the relevant provision of law. In Vodafone’s case – though the Shome panel has not specifically referred to it – the company did not deduct tax at source on the payment made to Hutchison Whampoa for acquisition of the latter’s telecom business in India, as it was an offshore transaction involving non-residents and the then prevailing law, in the Supreme Court’s opinion, did not provide for any such withholding obligations even if an indirect transfer of assets took place. For Vodafone to be now called upon to explain the non-deduction of tax, based on a law amended retrospectively, would be unduly harsh. Making it harsher still is the fact that even if a retrospective tax claim is made, Vodafone cannot be expected to deduct the same on what has already been a consummated transaction.

Tax law has always been a fertile ground for ‘cat and mouse’ games between taxpayers and the revenue authorities. On occasions where the judiciary rules in favour of the assessee, the sensible course of action for the authorities would be to accept the verdict with good grace and go about remedying the situation for the future. The Shome panel’s arguments make sense, not only from a narrow tax legislation perspective, but also from the larger macroeconomic context applying to the Indian economy. The April-June quarter saw large forex outflows, causing the rupee to plunge from around Rs 51 to Rs 57-to-the-dollar during this period. Much of this had to do with the negative perception that the retrospective tax changes generated among foreign investors. The fact that these specifically targeted Vodafone-like transactions – by even seeking to overturn the Supreme Court verdict against the Revenue Department in this case – aroused apprehensions regarding the predictability and stability of tax laws in India. Whether these were exaggerated fears or the amendments merely “clarificatory” in nature to reflect original “legislative intent” are irrelevant here. What was real was the impact of perceptions, leading to capital outflows and the rupee’s free fall. And so long as the country needs large amounts of foreign capital – if only to bridge a widening gap in its external current account transactions – perceptions matter.

Now that the Shome Committee has given its views and the Finance Ministry under P. Chidambaram, too, has been projecting a position more in tune with current realities, the Government has a basis for reworking the tax law provisions that have been the source of unnecessary uncertainty. The one recommendation that should definitely be accepted is the taxation of transactions, involving indirect transfer of assets, on a prospective, rather than retrospective basis.

Published on October 10, 2012
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