The job is far from over. The UPA Government will have to get Parliamentary nod if it were to decide to bring indirect transfer of shares to tax on a prospective basis.
This is because Budget 2012-13 had inserted several explanations (with retrospective application) in various sections of the income tax law.
These ‘explanations’ need to be revisited if the Government accepts the Shome Panel recommendation to bring indirect transfers to tax prospectively, say tax experts.
For repairing the income tax law, such explanations need to be either modified or done away with, they said.
Besides insertion of ‘explanations’, the source based enabling provision to tax income of non-residents – Section 9 – was amended to bring indirect transfers like the Vodafone-Hutch deal into the tax net.
The legislative changes were described by the Finance Ministry as “clarificatory”.
The explanations were inserted to clear the air that it was always the legislature’s intent to bring indirect transfers to tax, Finance Ministry officials had earlier said, defending the move to introduce the explanations in Finance Bill 2012.
The clarificatory amendments had to be done from the day the Income-Tax Act came into force and hence carried the moniker “retrospective amendments”.
This amendment helped overrule the Supreme Court judgment which ruled in favour of Vodafone after interpreting Section 9.
In light of Shome Committee recommendations that amendments are not genuinely clarificatory in nature, it now needs to be seen whether Government will reconsider retrospective application of such amendments.
“If the Government were to go ahead with the Shome committee recommendations, then necessary amendments would be required considering amendments which are not clarificatory in nature generally has prospective application,” said Aseem Chawla, Partner, MPC Legal.
Therefore earlier amendments made in law including insertion of explanation having retrospective effect would require to be revisited, he said.
However, it will be interesting to note which way the Government will move given that the Attorney General has already opined on the appropriateness of retrospective amendments.
So do ‘explanations’ have the same force of law as the main provision?
“Explanations do not have the same force of law as the main provision. They are secondary to the main provision. But explanations are certainly part of law,” said Sunil Jain, Partner and Head of Direct Tax Practice at J Sagar Associates.
Jain felt that the Government cannot adopt the route of issuing a ‘circular’ for bringing indirect transfers to taxation on a prospective basis.
Chawla said that explanation is a part of the main section and that it cannot be read in isolation.
“The intention of adding the Explanation is that if anything is not clear in the main section, then it shall be made clear by adding the Explanation,” he said.