The Supreme Court ruled last week that State governments could collect taxes from mining companies retrospectively from April 2005. The mining companies had pleaded that the tax be collected retroactively from July 2024 when a nine-judge Bench of the Court had ruled that the States could indeed collect such taxes. The ruling has once again raised the highly vexed issue of retrospective taxes, even as it strikes a blow for fiscal federalism.
It will be recalled that in 2007 the government had told two foreign companies that they were liable to pay a very large amount of money because the assets were in India though the company owning the assets was domiciled in another country. A few years later the Supreme Court had said that the tax law could not be applied to the case since the Indian income tax rules did not provide for indirect transfer of assets. This had led to the infamous retrospective amendment to Section 9 of the Income Tax Act by the government in 2012 which allowed it to tax indirect transfer of assets held in India, retrospectively from 1962. It took almost a decade for the mischief wrought by this amendment to be undone by the government. Just as the ghost of retrospective taxation was laid to rest and businesses began to breathe easy comes the Supreme Court verdict now asking mining companies to pay tax with retrospective effect.
The economic and commercial consequences of this ruling could indeed be serious. It can be very unsettling for businesses who can never be certain of their future liabilities. A report in this newspaper pegged the impact of the retrospective liability on mining companies at over ₹1 lakh crore. Apart from the financial burden on the companies, it can also lead to a spiralling of costs downstream as the miners pass on the extra tax outgo to their buyers.
Laypersons can legitimately ask if the doctrine of promissory estoppel does not apply to the sovereign, and if not, why not. This doctrine which applies to individuals says that if one party to a contract makes a promise on the basis of which the other party acts in a certain expected and reasonable manner, and the first party then reneges on its promise, that broken promise is enforceable. Fairness rules suggest that just because one of the parties is the sovereign and the promise concerns taxation, it must not be allowed to break that promise. The sovereign can argue that it never promised anything in writing and the courts can say that their job is to interpret the law. An interesting aspect of the doctrine of promissory estoppel, meanwhile, is that it does not require the promise to be in writing. It is also true that retrospective legislation does exist in other countries. Even if these are mostly efforts to undo a past wrong, sovereign right is not exercised arbitrarily. Nor is it the case that the courts are guided by that right or principle alone.