Validity of Retrospective Amendments to Taxation Statutes

Introduction:

India, one of the fastest growing economies of the world with an exemplary rate of GDP is a nation which in spite of abundant social, cultural, economical, political etc. problems is making its roaring presence in virtually each and every happening on the global scenario.

The population stretch of the country consists of below poverty liners and extends till the ones included in “Forbes Top 10 Richest.” The main source of Government revenue being tax, which contributes approximately 18% revenue to the GDP, and has always been a very sensitive issue taking into consideration the economic condition of population at large with synchronisation to the progress targeted during budget and actually achieved.

The phase of evolving a perfect taxation platform is still in the probationary period which is struggling for perfection on both State and well as Central level after giving due consideration to the Legislature and the Judiciary.

Recently, the Government has introduced taxation by way of Retrospective amendment to the statutes which prima facie seems justified when read along with Constitutional provisions and Supreme Court rulings, but needs an in depth analysis as to the pros and cons of the same. The question which arises is whether such amendments should be allowed? If yes, then whether conditionally or otherwise?

A retrospective amendment with respect to an enactment has some sure shot implications i.e. it affects an existing contract, even at many times leads to reopening of completed transactions, affects accrued rights and remedies and even affects procedure [1] . Probably all these implications make it even more important to discuss the validity of a retrospective tax amendment.

Immediate need of Attention:

The decision of Government to levy service tax on renting of immovable property used for commercial purposes with retrospective effect, attracted severe criticism from the community at large. Renting of property for commercial purposes is a very common activity which is undertaken by the common man to a Fortune 500 company. Although the Hon’ble Punjab & Haryana High Court recently upheld the validity of such an amendment [2] , the consensus of the general public and professionals has called it just an act to create bearing on High Courts while disposing of similar writ petitions in their respective jurisdiction.

The issue is not to determine the intention of the Hon’ble court but to determine the “unpredictability” of India’s tax regime. The Supreme Court laid down that a single transaction cannot contain both transfer of right and a service [3] , the activity of renting is by definition, a transfer of right and thus cannot be considered rendering a service, so the idea of service tax in the present case is absurd. Above all this, Ministry of Finance itself in a circular [4] mentioned specifically that activity of letting out premises is ipso facto not rendering a service. The question arises, when the thumb rules to decide the case were already present by way of precedents, the ruling of the Hon’ble court is surprising and contradicting creating an unnecessary dilemma in minds of public as to which is the correct interpretation.

It has been a tendency in recent Finance Acts to change the position of law in relation to the Income Tax Act through retrospective amendments; in order to overturn judicial decisions against the Revenue. In this context, a question arises as to what extent the legislature can nullify previous judicial decisions through allegedly ‘clarificatory’ amendments; which actually change the position of Law.

An amendment can be introduced in different forms. In India, most notable ways includes introduction of a new piece of Legislation overriding a legitimate argument of taxpayers mostly backed up by any interpretation of law or any judicial precedent and the other is by way of addition of explanation to the legislation, terming it as a way to clarify the intent of law.

The Finance Ministry has defended the recent trend towards increased retrospective amendments to the income-tax law handed down in successive Budgets. The Revenue Secretary, Mr P.V. Bhide, said that such amendments were required to correct the “aberrations” that had come in by decisions of the quasi-judicial bodies, which went against the legislative intent.

It is a known fact that the Legislature can always revalidate a law quashed or stayed by a court by bringing in necessary changes. But in reality are our politicians ready to compromise their so called legislative intent for public good or facility? Or is our judicial system flexible enough to accommodate such changes in a hard frame of a statute’s preamble? All these foundation defects when linked to a super sensitive subject area of tax, definitely requires immediate attention. The judiciary decides not only on the implementation of law by the executive, but also on the validity of the legislation sought to be implemented. One of the functions of superior judiciary is to examine the competence and the validity of legislation, both from the point of legislative competence as well as its consistency with fundamental rights. Hence, there is always a risk labelled with an excessive imposition to be quashed on grounds on unconstitutionality.

Validity of the retrospective enactment as of NOW:

The cogency of a retrospective enactment depends upon the following conditions:

Parliament / State legislature can make a retrospective amendment of the law in cases where such legislation does not contravene other provisions of the Indian Constitution.

A defect noticed by judicial decision can be cured by legislature retrospectively, thereby rendering that judgment ineffectual. However, it is a precept that the legislature cannot directly over-rule judicial decision; it can retrospectively cure the defect noticed by the Judicial decision thereby rendering the judgment ineffective, by way of a validating legislation [5] .

As per Article 141 of the Constitution, an amendment should not directly interfere with the principle (ratio decidendi) laid down by the Supreme Court. As per the provisions of Article 141 of the Constitution, the law declared by the Supreme Court shall be binding on all the courts within the territory of India. Thus, all authorities, civil and judicial, in the territory of India shall act in aid of the Supreme Court. Moreover, a court does not have any agency of its own to enforce its orders and thus aid of the executive authority of the State is needed for implementing court orders. If a retrospective amendment of law is a direct interference with the principle laid down by the Hon’ble Supreme Court, then it would be struck down as unconstitutional and invalid. Thus, the might of the State must stand behind court orders for the survival of the rule of the court in the country. [6]

The amendment should not create any unreasonable restriction upon the fundamental or existing statutory rights of the tax payer. If it creates untoward fiscal impacts on the tax payers so as to deprive him of his rightful claim, then in such a case, the amendment cannot be upheld to have been done in public interest and is arbitrary and discriminatory and violates Articles 14 and 19(1) (g) of the Constitution of India. [7]

The restrictions must not be arbitrary or of an excessive nature so as to go beyond the requirement of the interest of the general public. As laid down by the Hon’ble Supreme Court “The test of reasonableness is not altogether subjective and its contours are fairly indicated by the Constitution. The requirement of the reasonableness runs like a golden thread through the entire fabric of fundamental rights. The lofty ideals of social and economic justice, the advancement of the nation as a whole and the philosophy of distributive justice – economic, social and political – cannot be given a go-by in the name of undue stress on fundamental rights and individual liberty. Reasonableness and rationality, legally as well as philosophically provide colour to the meaning of fundamental rights” [8]

It is thus the duty of the court to evaluate the reasonableness of the retrospective amendment of law in light of the above mentioned principle to ascertain whether it violates the provisions of Article 19(1) (g) of the Constitution so as to declare it as unconstitutional.

India: Ready or Not?

Introducing a retrospective taxation amendment into a present taxation system is hard on both ends i.e. for the government to implement and for the people to accept. A sudden imposition of a tax with a retrospective effect generates a huge amount of money flow in the backward direction i.e. from people to government. The increased money flow results in lack of credit in the hands of the public and they are left helpless with a heavy tax burden on their heads.

To survive, a common man is left with two options-either increase the earnings anyhow or cut down on basic requirements. The businessmen to continue making profit, will increase the product prices, which will definitely be a high percentage as the cumulative effect of the retrospective tax is huge and the service class will demand more remuneration, and the worst hit would be the labour class whose fate is often ignored while making considerations. The well set economic structure will go for a toss. The validity of such retrospective amendment statute might prevail, but it does not have any significance. It will always be referred to as a bad law. Unless and until the incidence of such tax is very well known to the public and due to any constraints it is within reasonable limits for the public to understand the necessity of such amendment to be introduced, it will continue to remain unwelcomed.

As a retrospective amendment affects ongoing contracts too, it is very difficult for the contracting parties to accommodate a new levy against their private interest agreeable to both ends at once. In addition to domestic issues, International transactions will also suffer a heavy blow and will certainly affect the foreign investment and faith, triggering financial crunches. It is never wise on the part of the government to create new tax sources on cost of the previous one’s against will of people.

A very vital point to take into consideration will be the implication of retrospective amendment on the judiciary itself. By retrospective amendment, a government creates or extends the incidence of tax on public. In case of direct tax, the recovery is easier as the charge is created on the principal taxpayer only but in case of an Indirect tax the principal taxpayer has to recover tax from the subsequent party, which seems next to impossible practically keeping in mind the present data and disposal rate of Indian judiciary. This will result into two situations i.e. the principal tax payer will end up losing huge amounts and incur debts for the same or he in order to recover the amount from the subsequent parties will resort to judicial help which altogether will account for large number of recovery suits and later pendencies. Also, Article 245 and 246 of the Constitution prohibits Legislature to exercise its plenary power to declare a judicial decision invalid [9] , leaving academia with a challenge to work out on planning a way out of such situations which will avoid strife between the judiciary and legislature.

CONFLICTS:

“Nova Constitutio Futuris Formam Imponere Debet Non Praeteritis”

It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended and it is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation [10] . But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only. Thus in order to qualify as a ‘retrospective law’ the words used must expressly provide or necessarily connote retrospective operation. [11]

It is undoubtedly true that there is a presumption of constitutionality as to statutes, it is now beyond doubt that “…the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to hostile or discriminating legislation…” [12] It is arguable that the aforesaid principle finds applicability in cases of retrospective application of taxing statutes. At the same time, one must also take into account the fact that economic/taxation legislations enjoy a stronger-than-usual presumption of constitutionality. Whether the retrospective operation would affect the strength of this presumption is a matter on which the law is unclear. Perhaps more importantly, it can be argued that if an alleged clarification seeking explanation as to how to get over previous judicial decisions seems to be in substance amounting to a “new” and “unforeseen” levy – or is it in substance, a change as opposed to a clarification i.e. whether the retrospective amendment will be rendered unconstitutional?

Abuse of power by the Legislature

The legislature in recent times has perverted its power to enact retrospective changes in taxing statutes. One major instance would be of the Finance Act, 2009, which exemplifies several retrospective alterations in the Income Tax Act; the solitary purpose of which being changing the legal position after an ‘inconvenient’ interpretation. Thus, while intending to elucidate the provision, these impugned legislations have lead to unanticipated burden on the taxpayers.

It is to be noted here in cases of equivocalness in tax provisions, the law ought to be interpreted in favor of the taxpayer, keeping in mind the conventional principle that in cases where two interpretations are possible the one in favor of the taxpayer ought to be preferred. The rudimentary rule being that it is the Parliament which is enacting the law, thus there could be high chances of it being worded ambiguously to favor the national exchequer. One ground to contend is that Parliament may have worded the law differently at the primary stage but in no case a defence to blunders committed by it, as it could have amended the wordings with retrospective effect. The interpretative process should thus incline to a greater extent towards the tax payer than it presently does.

On an in depth analysis of the present Indian scenario, the position that emerges is, that the Government any how has the weapon of retrospective amendment available for its disposal and assessee has realized that it is better to pay tax and not to combat the legislation. Even if he brings home the bacon, the department still has the power to come up with a retrospective amendment which would ultimately result in his paying the tax. The second very important observation is that normally Government amends the law when it is pending or decided by the Apex Court, but Retrospective amendments are to be done when the decision of the Highest Court of India goes against the Government. The Government had assured the Delhi High Court that they will instruct the officers not to write letter for depositing the tax. [13] On the contrary, they came up with a retrospective amendment. If it goes further in the same manner the day is not far when we can see the retrospective amendments by way of tribunal decisions.

Alternatives:

The alternate viable for the government is to resort more to Minimum Alternate Tax (MAT) i.e. high income individuals, corporations, trusts, and estates pay at least some minimum amount of tax regardless of deductions, credits or exemptions by way of adding certain tax preference items back into adjusted gross income. Else government can withdraw the unnecessary exemptions and reliefs which are declared only to fulfil political goals. The best way is to make Goods and service tax (GST) sufficient enough to accommodate incidence of all money flows which the government expects to generate by levying varied taxes. Proper audit of government’s income and expenditure should be mandatory, and the same should be communicated to the public in order to strengthen their faith which is at present shaken by so many scams and corruption.

Conclusion:

Considering all the effects and conflicts with law, no government has the right in the process of extracting tax to cause misery and harassment to the taxpayer and the eroding feeling that he is made a victim of tangible injustice. Also, adequate measures ought to be taken by the government at the time of formulating laws so as to prevent any future imbalances and promote stability in the economic structure thereby preventing public distrust due to improvidence of the legislators. It is also the solemn duty of the legislature to act promptly while amending the laws because it is at last the general public at large, who are left at the clemency of legislators. Also, the retrospective amendment should be countenanced in the rare cases where it is essayed that there are omissions/errors/lacunae in drafting or if the intention of the lawmakers is not clearly divulged in the laws drafted by them , which has led to protracted litigation before the Judiciary. Court might have upheld the constitutional validity of a retrospective amendment but considering the harsh realities one is bound to conclude that what is legal as declared by legislature and upheld by the judiciary may not unremittingly be ethical, upright and equitable.