The Taxation Laws (Amendment) Bill 2021, seeks to dilute the legal effect of a law passed more than nine years ago. The 2012 law sought to lay down the true scope of taxation of gains arising from transactions involving overseas assets, so that the legislative intentions are made abundantly clear.

It must be said at the very outset that the income tax law as it stood even before the 2012 amendment, had always intended that the gain accruing to a non-resident from the transfer of an overseas asset, to be brought within the ambit of Indian Income Tax Act and taxed. But for the tax to be so imposed, the asset in question must have embedded within it, an underlying Indian asset or a portfolio of such assets thus providing an ‘Indian Connection’ to the transaction.

More often than not, there are practical difficulties in the recovery of the tax due from an entity that had actually gained from the sale of an overseas asset with embedded Indian assets. Hence the law from the very beginning, had contemplated the process of recovery of tax dues to India, to be mitigated somewhat by casting an obligation on the buyer to subtract a part of the sale consideration due to the vendor as ‘tax deducted at source’ or TDS. There are no difficulties if such a buyer was a resident entity. For then, enforcing that obligation to remit the TDS so deducted, to the Indian tax authorities is easy.

But if the prospective buyer too is a non-resident entity then there is a difficulty in enforcing the TDS obligation. To overcome this difficulty, the initial design of the tax law contemplated a resident entity as ‘representative assessee’ to stand in the shoes of the overseas vendor and submit itself to the legal process of recovery.

But before a ‘representative assessee’ can be made to stand in the shoes of the original buyer, it is first necessary for the tax authorities to establish that the buyer did indeed engage in a transaction that conformed to all the ingredients of Indian tax law and any decision by them is subject to judicial review and challenge.

The apex court googly

A Supreme Court ruling seemed to put pretty much all transactions involving overseas assets to be outside the purview Indian income tax law.

The 2012 amendment clarifying what the legislative intentions of the scope of law had all along been but whether the government would like it or not, was simply seen by prospective overseas investors as laying down the tax law with retrospective effect!

No wonder the 2012 amendment was given the pejorative label, ‘Retrospective Legislation’. What lent added reinforcement to this perception was that the amendment was particularly harsh on the UK based litigant (Vodafone Plc) which successfully argued the case before the Supreme Court.

The Court had clearly said that at the time when Vodafone concluded the deal, the transaction fell outside the scope of law on taxation of gains arising from the sale of overseas assets. Therefore there was no obligation to deduct tax at source!

Metaphorically speaking, it is as though the Supreme Court stood before the two contracting parties and oversaw the sale and gave its approval to the structuring of the deal. The Court may be right or wrong in its interpretation of the law when seen through the prism of legislative intentions. But the fact of the matter is that they are ‘Right’ because they are ‘The Last Word on the Subject’ prior to the 2012 Amendment. In effect, at the time when Vodafone transferred the funds to the vendor without deduction of tax at source, they were perfectly within their rights to do so.

Now, no amount of explanations spelling out the legislative intention can undo the fact of Vodafone having transferred funds without deduction of tax and one which the Supreme Court has sanctified with its ruling. How does one put the genie back in the bottle after it had been let out?

If this was the case with Vodafone then it must be held to be valid for countless other transactions that happened (such as there are) before the 2012 Amendment. None of this suggests that the tax liability of vendors on the gains made by them stand extinguished although each one of them who concluded sale right up to the 2012 law coming into force have a strong case in their defence.

That is because there is a difference between nullifying the rationale on the basis of which a judgment was delivered through retrospective amendments and effectively cancelling out the effect of a Court judgment itself through such legislations. The Court has held that the former is perfectly in order while the latter is clearly unconstitutional.

The government can argue till it goes ‘blue in the face’ that the Legislature always intended the law to be structured in a particular manner. But the problem is that there is a thin line between clarifying the true original legislative intentions and the impossibility of undoing past transactions from the buyers’ perspective. In the event, what options did the government have with regard to the past transactions? None.

A larger point needs to be made as well. There is constant struggle between two competing notions of what should govern the design of a tax law. On the one hand there is this notion that effective conduct of the affairs of the State requires that it cannot forever be a prisoner to this notion of ‘fairness or equity’ in the levy of a certain tax.

“There is no equity in tax law” is a dictum that has governed the design of tax laws. But the resource needs of the State must be seen with long-term revenue implications than immediate needs.

The writer is former Editor, BusinessLine