One of the provisions of this year’s Budget that has received most attention is the proposal that the Income-tax Act, 1962 be amended with retrospective effect from April 1, 1962. The proposed insertions are explanations that clarify, for example, that the definition of “property” includes rights in an Indian company. The introduction of these common-sense provisions serves, however, to invalidate the Supreme Court’s judgment against the government in the Vodafone income-tax case, which is what has caused the outcry. The concern is understandable. Indeed, a natural sense of justice is outraged at the thought of retrospective legalisation of the state’s demands. Yet intuition is sometimes ill-served by facts, and this could be one of those occasions.
Finance Minister Pranab Mukherjee has argued, correctly, that the Supreme Court in its judgment had stated that the words of the statute could do with some clarification. In the absence of specific legislative sanction, the judgment stated, it was not possible to find that certain transfers of assets located in India — in particular, through selling an offshore holding company — were taxable. The purpose of this amendment is to clarify that such sanction is available, thereby allowing the Court to make a more informed judgment. It is not illegal or unconstitutional. It is not even rare. There have been several such clarifications made, with retrospective effect, this year, last year — indeed, pretty much every year. It serves to invalidate a judgment, true, but in order to make the subsequent legal proceeding more institutionally sound, in that the sense of the legislation’s words are more obvious to the Court.
Since there is nothing unusual about this, why the outcry? First, because there is something problematic to most ears about the idea that well-meaning taxpayers can find the rules changed under them. However, this requires us to suspend disbelief mightily. The construction that the new legislation explicitly provides to the old Act is common sense, and it is one that many legal authorities — including the Bombay High Court — believed already existed. Second, there is anger because it appears that this will stoke foreign investors’ belief that India is a banana republic, with no rule of law, and uncertainty for investors. This argument, too, is not grounded on fact. After all, retrospective changes to tax law are common in many jurisdictions. And such changes end up adding certainty, not taking them away: they encourage investors to transparently participate in the taxes and overground economic life of a modern economy, not in the legally uncertain, byzantine shadow world of tax havens and offshore territories.
The idea that foreign investors will necessarily be scared off by a government determined to participate in the global effort against tax havens and untaxed income cynically misreads the intentions of most investors in India — and does so in a manner reminiscent of anti-market Luddites. Finally, most potent is the fear that this provision is another marker of this being a backward-looking Budget and establishment, longing for the controls of a bygone era. Much else would burnish that belief, but not this amendment. In fact, a mindset that accepts that no active or retrospective efforts can be made against tax havens is backward-looking, out of step with the world’s major economies’ determination to fix the holes in the global financial system.
