Predictability in taxation policy is the bedrock of any vibrant, stable and investment friendly Government. In 2014, when the NDA Government took charge, it professed "Minimum Government - Maximum Governance" and "Ease of Doing Business" alongwith the need for a fair and stable taxation regime.
The policy that this government does not support any retrospective amendment in tax laws was announced in 2014 in its first Union Budget itself. The urgency and alacrity of the announcement perhaps lay in the numerous retrospective amendments carried out by the previous Government – the most disastrous being the amendments made to the Income Tax Act in 2012 to nullify the landmark judgement of the Supreme Court in the Vodafone's case. The Supreme Court had held that "indirect transfer of shares" involving foreign jurisdictions cannot be taxed in India. The retrospective amendments sought to undo this principle of law laid down by the Court.
These amendments deeply hurt India's credibility as an attractive investment destination. It revived the unpleasant instances of India's flip flop in the past such as bank nationalization, abolition of Privy purses etc. It also cast a shadow on the credibility of India's liberalization and privatization policy – professed and implemented since 1991.
The NDA Government has mostly lived up to its promise and, in fact, recently in 2021, taken the bold step of nullifying the 2012 amendments. However, the present Government is not entirely unblemished. A closer look at the Union Budgets of the last few years would reveal that they have also undertaken retrospective amendments in both Income Tax and GST laws, sometimes even by way of 'clarifications' (such as disallowance of transition of erstwhile cess credits into the GST regime, disallowance of tax depreciation on goodwill etc.)
With the Union Budget around the corner, there is a muted apprehension that the Government may once again resort to retrospective amendments to override a few significant tax friendly rulings passed by the Supreme Court and jurisdictional High Courts.
The first issue is regarding the power of the Directorate of Revenue Intelligence (DRI), an intelligence and investigative agency, to issue show cause notices demanding customs duty, interest and penalty from importers. In March 2021, a three-judge bench of the Supreme Court in Canon India held in unequivocal terms that an officer of the DRI is not a "proper officer" to issue Show Cause Notices or raise a customs duty demand against importers. It is the officer who had undertaken the original assessment of imports or his successor, who would be the "proper officer" to issue Show Cause Notices and demand customs duty. As an aftermath of the Supreme Court judgement, High Courts and Tribunals have quashed Show Cause Notices issued by DRI officers on account of an inherent lack of jurisdiction . Given the stakes involved, the Government could resort to amendments in the forthcoming Budget to retrospectively empower the DRI to issue show cause notices and validate their past actions.
The second issue has its genesis in the Union Budget of 2021-22 – when the system of reassessment proceedings under the Income Tax Act was completely revamped with the objective of controlling the wide powers available in the hands of the Assessing Officers. Under the new set of provisions, which were effective from 1 April 2021 onwards, the Assessing Officer is required to mandatorily conduct an enquiry and provide an opportunity of hearing to the assessee prior to issuance of any reassessment notice. The new provisions permitted the Assessing Officers to only reopen matters for the last three assessment years (except for certain high stake matters). Even after the introduction of the new provisions (i.e. after 1 April 2021), it was observed that the Income Tax Department continued to issue reassessment notices under the old reassessment provisions. Various High Courts across the country have quashed thousands of reassessment notices on the ground that after 1 April 2021, reassessment proceedings could only be initiated under the new law.
The Government would be within its right to seek a review / appeal against these judgements before the Courts or make a prospective amendment in laws. However, given the stakes involved as well as the past actions of the Government, there is an apprehension that retrospective amendments could be introduced in the Union Budget of 2022-23 to empower the Tax Department to raise tax demands.
It has routinely been observed since Independence that an adverse verdict from the Courts on any major issue has been nullified by a retrospective amendment in the next Budget. These amendments are an affront to the judiciary as well as the taxpayer – whose long drawn efforts are reduced to naught by the stroke of a pen. Late Nani Palkhivala, while criticizing a retrospective amendment in 1983 had remarked that it is "a triumph of bureaucratic obstinacy over good sense".
The retrospective amendments have historically proved catastrophic for India's business growth and foreign investment. They not only increase the 'risk of doing business' but are against the tenants of a stable, democratic and investor-friendly country - all of the traits to which India is professed to. We can only hope that the Government makes an exception this year and allows the above rulings to stand. Such an approach will also be in sync with the promise made in 2014.
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