Retrospective Changes in Tax Law

In the recent Vodafone Judgement, Vodafone had argued that the government had no jurisdiction over a transaction between two foreign companies occurring on a foreign territory. However, there was a strong moral counter-argument. The business that changed hands was entirely based in India. The government got an opportunity to reflect on the requirement of a new legislation. Hence it wants to retrospectively change the rules. The finance minister, Pranab Mukherjee, proposed retrospective changes to India's tax rules during his budget on March 16, prompting speculation that Vodafone's $2.2 billion tax case could be reopened.

The Supreme Court ruled on January 20 that the country's tax department has no jurisdiction over Vodafone's 2007 deal to buy Hutchison Whampoa's Indian mobile business for $11 billion. It was argued that the Indian tax office has no right to tax the transaction between two foreign entities. Government authorities had said the deal was liable to be taxed since most of the assets were based in India.

While reversing the interpretation given by the Supreme Court in the Vodafone case, the Budget proposal broadens the scope of State's power to tax all past income arising as a result of existence of actual economic nexus, irrespective of the place of residence of the entity deriving the income.

It makes it clear that India has taxation right on income derived on offshore transactions where the value is attributable to the underlying asset in India, and that this taxation right is not lost due to the structure or mode through which such gain is realised.

Retrospective amendment in tax legislation is legally permissible, as held by the Supreme Court in several cases. The SC has further held that Validating Acts are not necessarily arbitrary and are often enacted to retrospectively remove infirmities that might have led to invalidation of provisions imposing the levy.

Double non taxation is considered as much of an evil as double taxation. Besides, in equity too, there is no justification for the government favouring large taxpayers indulging in dubious tax planning, in so doing passing on the tax burden to ordinary taxpayers.