Even as the stock markets cheered Budget 2010, it has left a sour taste with companies on some proposed amendments in the Finance Bill, many with retrospective effect. There are 16 direct tax amendments in Budget 2010 with retrospective effect, some of them coming into effect from as way back as 1976.
Naveen Aggarwal, executive director, KPMG said these amendments are aimed at side-stepping the courts, which detracts from the whole relevance of the judicial process. What’s worse is that this has become a disturbing trend in the past four or five years.
Research by KPMG reveals there were eight amendments in direct taxes with retrospective effect in Budget 2005, 38 in 2006, 32 in 2007 and 38 in 2009. By this yardstick, this year has been a welcome relief in that there were only 16 such amendments (see table: “Back dates”).
| BACK DATES Why companies still fear the taxman | ||
| Budget | No. of Direct Tax Amendments* | No. of Retrospective Amendments* |
| 2005 | 109 | 8 |
| 2006 | 146 | 38 |
| 2007 | 165 | 32 |
| 2008 | 94 | 24 |
| 2009 | 120 | 38 |
| 2010 | 91 | 16 |
| *Includes amendments in sections & sub-sections of the IT Act Research by KPMG | ||
The problem with these amendments, say tax experts, is that many of them overrule court rulings. ‘‘A company may have secured a court ruling but a legislative amendment will overrule it, and the company will have to pay tax with retrospective effect. This is creating uncertainty in business circles,’’ said Sunil Badala, partner, BSR & Co.
For instance, the Supreme Court in a ruling in 2007 had held that services of non-resident service provider can be taxed in India only if the service was physically rendered and utilised in India. The Finance Bill of 2010 has clarified that such services will be taxed in India, irrespective of where it was rendered, if it was paid for or used for an Indian business. This amendment comes into effect from June 1, 1976.
Similarly, the Budget proposes, with retrospective effect from 1981, to empower high courts to admit an appeal filed after the expiry of the time limit of 120 days provided in the Act, if the delay in filing appeal is for sufficient cause.
This amendment has been made to overcome various court rulings that held the High Court has no power to condone delays in filing appeals, say tax experts.
| IN RETROSPECT Key Retrospective Amendments in the last few years | ||
| Particulars of retroactive amendment | Proposed/introduced in | Effective from |
| Royalties or fees for technical services would be taxable in India even if services are rendered outside India | Finance Bill 2010 | 1-Jun-76 |
| High Courts have the power to condone the delay in filing of appeals/ reference applications | Finance Bill 2010 | I June 1981 |
| Assessing officer has the power to reassess a particular item of income, even though it is not covered by the reasons for reopening the assessment | Finance Act 2009 | 1-Apr-89 |
| Tax holiday claim not eligible if not made by way of claim in return of income | Finance Act 2009 | 1-Apr-03 |
| Disallowance of provisions for diminution in the value of assets for MAT computation | Finance Act 2009 | 1-Apr-98 |
| Disallowance of deferred tax and dividend distribution tax for MAT computation | Finance Act 2008 | 1-Apr-01 |
| A simple direction to initiate penalty proceedings in the assessment order is sufficient for initiating a penalty | Finance Act 2008 | 1-Apr-89 |
| Holding a person as assessee-in-default for ‘not deducting and depositing TDS’ alongside ‘deducting but not depositing TDS’ | Finance Act 2008 | 1-Jun-02 |
| Research by KPMG | ||
These rulings curbed the power of the tax department to contest the case successfully before the high courts, where there were delays in filing the appeal by the department. However, the larger issue that remains to be addressed is the gross negligence by the department in timely filing appeals to the High Court, say tax experts.
Similarly, an amendment last year (Finance Act, 2009) allows tax authorities to reopen assessments if they believe some income has escaped their assessment. It allows the tax authorities to reassess any income, which comes to their notice even though the income heads may not have been recorded in the reasons for reopening the assessment. The amendment comes into effect from 1989.
These are just a handful of the 150-odd retroactive amendments in direct taxes in the past three or four years. ‘‘With one stroke of the pen, you are reversing court rulings. It gives tax authorities the powers to re-open cases that have been concluded in favour of the taxpayer after long-drawn litigation,’’ said KPMG’s Aggarwal.
A corporate lawyer said such amendments would be very unsettling. ‘‘A company may have acted according to the prevailing law, made expansions or drawn up plans, and may have gone to the court to interpret a rule. Such amendments only go to show one cannot be sure of what government is doing and what it may want two years later,’’ he said.
The government may want to correct some “aberrations” by decisions of quasi-judicial bodies that went against the legislative intent but tax experts feel these will affect the legitimate expectations of the taxpayers regarding the certainty, stability and predictability in the tax regime of the country.
