Number of proposals to improve tax compliance are draconian
A number of proposals to improve tax compliance are draconian and leave scope for harassment.
Finance Minister Pranab Mukherjee made a spirited defence of the decision to retrospectively nullify the Vodafone case. His speech introducing the Finance Bill 2012 was high on rhetoric but low on logic. The repeated references to tax havens and one retrospective amendment in the United Kingdom cannot justify an annual ritual of overruling retrospectively every judgment that is in favour of the assessee.
The announcement that implementation of the controversial General Anti-Avoidance Rules (GAAR) was being postponed by a year was perhaps the only silver lining in the speech. But there is no justification for imposing GAAR even next year. Mere shifting of the burden of proof to the Income Tax Department is not enough. The manner in which the power to reopen assessments continues to be misused, creates serious apprehension that the GAAR provisions will be indiscriminately applied. No GAAR committee will be willing to drop any proposal to levy huge taxes. The increasing trend of passing the buck to the high courts and the Supreme Court will mean increased litigation for assessees.
GAAR, by definition, focuses on tax avoidance and is suitable for advanced countries with high levels of tax compliance. In India, the curse is widespread tax evasion, but no effort is made to check leakage of tax revenue in sectors where large amounts of black money are involved, such as real estate or higher education. A few raids can hardly curb this menace. The Finance Minister will do well to target known areas of tax evasion rather than waste time on GAAR which will only lead to more litigation with very little additional revenue.
An unprecedented number of amendments have also been made retrospectively. These include vastly increasing the scope and meaning of words like 'property', 'transfer', 'capital asset' and 'royalty'. 'Property' will now include not only rights of management or control but "any rights whatsoever" in or in relation to an Indian company. The word 'transfer' shall always be deemed to have included, from 1962(!), not only transfer of an asset but even the creation of any interest in an asset "in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily…".
Such 'creation' can be outside India and can even flow from a transfer of a share outside India. In the Vodafone case, the Supreme Court categorically held that the transfer of a share is different from transfer of any underlying assets. Indeed, this was the law for the last 100 years. The distinction is again sought to be nullified with effect from April 1, 1962. Such a wide definition is bound to lead to high pitched tax demands and harassment.
The definition of 'royalty' has been amended retrospectively from 1976, and destroys the distinction between the sale of packaged software and transfer of copyright of the software. The difference is as fundamental as between the selling of a book and selling the copyright of the book. The former can never attract royalty.
Payments to foreign suppliers of software will now be 'royalty' requiring deduction of tax at source. This senseless amendment is contrary to a Supreme Court decision that held that sale of packaged software was a sale of goods and not a transfer of licence. Now, even providing of information for a consideration will be royalty!
Will this also cover subscriptions to technical, scientific or commercial journals on the ground that they impart information? A dangerous and impractical amendment has been made to Section 195 dealing with tax deduction at source, once again retrospectively from April 1, 1962. Every non-resident Indian is now required to deduct tax at source whether or not he/she has "any other presence in any manner whatsoever in India". Thus, even if a nonresident person has no residence, no place of business in or business connection with India, he is under obligation to deduct tax at source with regard to transactions that may be liable to Indian income tax. To what extent this absurd provision will be invoked remains to be seen. It is preposterous to create a retrospective obligation to deduct tax at source in, say 1995, by an amendment in 2012.
The amendments to the Central Excise Act and the Customs Act are astonishing. Those accused of offences punishable with imprisonment for more than two years, will not get bail unless the public prosecutor is given a chance to oppose the application. Even worse, the magistrate has to be satisfied that there is a reasonable ground to believe that the accused is not guilty of any offence and the accused is unlikely to commit any offence while on bail. This is bound to lead to widespread corruption. Suppose the public prosecutor does not turn up in court? Does it mean that the accused will continue to be in jail? How can a magistrate, at the initial stage and without carefully examining the documents, come to a reasonable conclusion about the innocence of the accused? How can any magistrate have the divine vision to determine whether or not an accused will commit any offence while on bail?
No person with an elementary knowledge of criminal law could have drafted such a ridiculous provision. Noting the opposition to these provisions when Budget 2012 was announced, the Finance Minister had said they would be omitted entirely. Shockingly, they continue to find place in the Finance Bill, 2012 and will now be part of the Customs Act and the Central Excise Act.
In the end, the Finance Minister has done nothing to inspire investor confidence. Assessees in the software sector and those having dealings with non-residents should brace themselves for extensive, unproductive litigation in the years ahead. India has now entered a dangerous downward spiral where the organised, productive and reasonably law-abiding industrial and service sectors are subject to savage amounts of multiple taxes. These sectors have to pay for the mismanagement of the economy as the proportion of tax-evaders and the shadow economy keeps increasing. Unless we have sensible and equitable tax laws, it is only a matter of time before the black market economy becomes the Indian economy.
The author is a senior advocate at the Madras High Court
The announcement that implementation of the controversial General Anti-Avoidance Rules (GAAR) was being postponed by a year was perhaps the only silver lining in the speech. But there is no justification for imposing GAAR even next year. Mere shifting of the burden of proof to the Income Tax Department is not enough. The manner in which the power to reopen assessments continues to be misused, creates serious apprehension that the GAAR provisions will be indiscriminately applied. No GAAR committee will be willing to drop any proposal to levy huge taxes. The increasing trend of passing the buck to the high courts and the Supreme Court will mean increased litigation for assessees.
Arvind P. Datar
An unprecedented number of amendments have also been made retrospectively. These include vastly increasing the scope and meaning of words like 'property', 'transfer', 'capital asset' and 'royalty'. 'Property' will now include not only rights of management or control but "any rights whatsoever" in or in relation to an Indian company. The word 'transfer' shall always be deemed to have included, from 1962(!), not only transfer of an asset but even the creation of any interest in an asset "in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily…".
Such 'creation' can be outside India and can even flow from a transfer of a share outside India. In the Vodafone case, the Supreme Court categorically held that the transfer of a share is different from transfer of any underlying assets. Indeed, this was the law for the last 100 years. The distinction is again sought to be nullified with effect from April 1, 1962. Such a wide definition is bound to lead to high pitched tax demands and harassment.
The definition of 'royalty' has been amended retrospectively from 1976, and destroys the distinction between the sale of packaged software and transfer of copyright of the software. The difference is as fundamental as between the selling of a book and selling the copyright of the book. The former can never attract royalty.
Payments to foreign suppliers of software will now be 'royalty' requiring deduction of tax at source. This senseless amendment is contrary to a Supreme Court decision that held that sale of packaged software was a sale of goods and not a transfer of licence. Now, even providing of information for a consideration will be royalty!
India has entered a downward spiral where the organised, productive and law-abiding sectors are subject to savage amounts of multiple taxes"
The amendments to the Central Excise Act and the Customs Act are astonishing. Those accused of offences punishable with imprisonment for more than two years, will not get bail unless the public prosecutor is given a chance to oppose the application. Even worse, the magistrate has to be satisfied that there is a reasonable ground to believe that the accused is not guilty of any offence and the accused is unlikely to commit any offence while on bail. This is bound to lead to widespread corruption. Suppose the public prosecutor does not turn up in court? Does it mean that the accused will continue to be in jail? How can a magistrate, at the initial stage and without carefully examining the documents, come to a reasonable conclusion about the innocence of the accused? How can any magistrate have the divine vision to determine whether or not an accused will commit any offence while on bail?
No person with an elementary knowledge of criminal law could have drafted such a ridiculous provision. Noting the opposition to these provisions when Budget 2012 was announced, the Finance Minister had said they would be omitted entirely. Shockingly, they continue to find place in the Finance Bill, 2012 and will now be part of the Customs Act and the Central Excise Act.
In the end, the Finance Minister has done nothing to inspire investor confidence. Assessees in the software sector and those having dealings with non-residents should brace themselves for extensive, unproductive litigation in the years ahead. India has now entered a dangerous downward spiral where the organised, productive and reasonably law-abiding industrial and service sectors are subject to savage amounts of multiple taxes. These sectors have to pay for the mismanagement of the economy as the proportion of tax-evaders and the shadow economy keeps increasing. Unless we have sensible and equitable tax laws, it is only a matter of time before the black market economy becomes the Indian economy.
The author is a senior advocate at the Madras High Court
