Time travel is no more a fantasy – at least, not in the corridors of the Tax Department in India. Things are not going the way you like? Made a mistake and want to correct it? As long as you are in charge of tax policy, anything is possible.
As unlikely as it seems for us to go back in time and change events, the tax authorities have adopted – in the past – tax provisions that are “retrospective” in nature. In other words, a new legal provision is introduced, which is effective from a previous date (sometimes going back 50 years). Another technique involves the simplistic solution of inserting clarifications to income-tax laws on the pretext of ‘clarifying the provisions of the law concerned, that is intended to be read in the manner ‘so clarified’.
Typically, a retrospective amendment is a brahmastra that the tax authorities should use (only) in a situation of gross misunderstanding/ misinterpretation of law. Second, the word ‘clarification’ always means stating something with the intended objective of avoiding confusion that may arise. Therefore, the introduction of a clarification to any provision of the law should be at a time of confusion and not when the judicial authorities have failed to accept the position of tax authorities.
Indirect transfer of shares
Case in point: The (in)famous Vodafone-inspired retrospective amendment seeking to tax indirect transfers of shares/ rights in an Indian company. Bear in mind, the Supreme Court had interpreted the existing statute and ruled in favour of Vodafone – thereby setting down the law that an indirect transfer of shares of an Indian company will not be taxable in India as per the current tax law. Also, the above is just a simplistic summary – the actual technical arguments are much more expansive and a treat for anyone with a bent of mind towards tax law.
Generally, a Supreme Court ruling is considered to lay down the law of the land. However, in the Budget following this landmark ruling, our Finance Minister did a complete reset. And this time, it was a no-holds-barred double-whammy of a “retrospective clarification”, effectively neutralising the Supreme Court ruling in a matter of weeks. Under the proposal, apparently, it was always the intention of the taxing statute to tax an “indirect” transfer of any rights, shares, and so on, of an Indian company.
Investor anger
The furore from the investment community was understandable. Lengthy pages were used up in explaining the impact of the amendment on existing MNCs in India. Also, since this “clarification” was applicable with effect from 1961, even companies which had exited India unknowingly (read via sale of a multi-level holding company in some corner of the globe) also came within the taxman’s trigger sights.
Well, times changed – or rather, the government changed. The new government brought in a feel-good factor to investors. Promises of ending “tax terror” and doing away with “retrospective taxation” became the cry for rallying investors. And, like any well-intentioned measure, this was bound to go wrong as well at some level.
The Government, in its recent Budget, announced that Minimum Alternate Tax (‘MAT’) will apply only to certain types of investors in specified conditions. And true to its promise, this change was “prospective” in nature.
The MAT issue
In simple words, MAT is a tax computed on book profits prepared under the Indian Companies Act with certain adjustments and payable in cases where the tax under normal provisions is lower. Generally, foreign investors who do not have a presence in India, took the view that MAT is not applicable to them.
Now you may wonder, isn’t this a good and beneficial amendment? Unfortunately, the downside of a prospective amendment is that the tax authorities are free to adopt an adversarial position for transactions which were undertaken before this change. Apart from the possibility of time travel, tax authorities usually are provided up to eight years to reopen cases for scrutiny in specified conditions.
In some cases, tax officers are taking the view that MAT is always applicable to foreign investors prior to this change in law and are seeking to tax investors who have undertaken transactions in the past. Thankfully, a Committee has been set up to look into this and will hopefully set to rest any controversies which could come about as a result of this.
Are all retrospective amendments bad? Surprisingly, the answer is “No”. As long as a retrospective amendment/ clarification helps in putting to rest litigation arising on account of varying interpretations of law, it is a helpful tool in fast-tracking dispute resolution and freeing up the administrative machinery.
(Monisha Jain from EY contributed to the article. The views expressed are personal)