Fairness of retrospective amendments

DIRECT TAX

A noticeable trend in the past few budgets has been legislation of retrospective laws. We have seen similar amendments being moved as part of this year's budget proposals and hence this debate has come to the forefront. The amendments can take different forms, notably in the following matter:

(i) Legislation overriding a legitimate argument of the tax payer either supported by an interpretation of law and/ or by decision of court.

(ii) Explanation being added to the legislation or otherwise clarifying the intent of law.

Allocation of powers ""Legislative, Judiciary and Executive

Under the Constitution, the Legislature is vested with the power to lay down the policy, the law and the rules. It is for the judiciary and courts to interpret the law, and for the executive to ensure enforceability, thereby maintaining a delicate balance of separation of powers as laid down in the Constitution.

Though the Parliament is supreme and there is nothing that Parliament cannot do lawfully, yet legislations passed by Parliament can be and have been held by courts to be ultra vires the Constitution.

The judiciary sits in judgment not only on the implementation of law by the executive, but also on validity of the legislation sought to be implemented. One of the functions of superior judiciary is to examine the competence and the validity of legislation, both from the point of legislative competence as well as its consistency with fundamental rights.

If the law is to play its allotted role of serving the needs of the society, it must reflect the ideas and ideologies of the society. It must keep time with the needs of the society and aspirations of the people.

Is the legislative power omnibus?

The legislature has powers to introduce enactments and amend enacted laws with retrospective effect; however, the same is not only subject to the question of competence but is subject to judicially recognised limitations.

Firstly, words used must expressly provide for retrospective operation as it is a settled law that a taxing provision imposing liability is governed by the normal presumption that is not retrospective.

Recently, the Supreme Court in Virtual soft system's case held that a provision must be read subject to the rule that in the absence of an express provision, the legislature did not intend to attribute amending a provision.

Secondly, the retrospectivily must be reasonable and not excessive otherwise, it runs the risk of being struck down as unconstitutional.

Lastly, it is apposite where the legislation is introduced to overcome a judicial decision. The legislative power cannot be used to subvert the decision without removing statutory basis of the decision. It is important that the above principles are adhered to failing which courts will intervene at the tax payers' behest.

Competence of the legislature

In Ujagar Prints case, the Supreme Court ruled that a competent legislature can always validate a law which has been declared by Courts to be invalid, provided the deficiencies noticed in the judgment are removed or cured.

Such law can also be made retrospective, if in the light of such curative exercise the earlier judgment becomes unenforcable. All that the legislature does is to usher a valid law with retrospective effect in the light of the judiciary's findings.

With respect to tax law, when a legislature sets out to validate a tax declared by a court (to be illegally collected), the cause for invalidity must be removed before validation. It is not sufficient merely to declare that the decision of the court shall not bind as it is tantamount to reversing the decision in exercise of judicial power, which the legislature does not possess.

A court's decision must always bind unless the conditions on which it is based are fundamentally altered.

Are the tax payers paying the price?

The legislature can always render a judicial decision ineffective by enacting a valid law within its legislative field fundamentally altering or changing its character retrospectively.

Further, the legislature cannot in exercise of its plenary power under Articles 245 and 246 of the Constitution merely declare a decision of a court of law to be invalid or to be inoperative. It is clear that under the scheme of the Constitution, the legislature does not possess such powers. Though it has been clarified by the courts that legislature has the powers to (retrospectively) clarify the intent of law.

Power to enact retrospective laws is restricted

Legislative function is principally concerned with the establishment of future rules of conduct. The presumption is that all laws operate prospectively.

In the absence of any indication in the statute that the legislature intended for it to operate retrospectively, it must not be given retrospective effect. If there is doubt, it should be resolved in favour of the tax payer. One can hope that settled principles are followed in their true spirit and that it does not result in unproductive deployment of expensive management time and resources to deal with such situations. The author is Partner, BMR & Associates. Views expressed are personal.