Opinion: Retrospective Law Should be Scrapped to Rebuild Investor Trust

(N.C.Hegde, Partner, Deloitte Haskins and Sells LLP and Jimit Devani, Director, Deloitte Haskins and Sells LLP)

The present government was voted with a clear mandate to improve the overall state of the economy. Understandably, expectations are hitting the roof ahead of the government's first full-year Budget. It is expected that the Budget would be a reformist one; the challenge before the government would be to strike the right balance between fiscal prudence and populist measures.

One of the key expectations from the Budget is to address the issue of retrospective amendments. Retrospective amendments introduced by the earlier UPA government along with aggressive nature of the tax authorities have had negative impact on investor sentiments. At a time when the global as well as the Indian economy growth was hampered, introduction of harsh retrospective amendments (such as taxation of indirect transfers, expanding the scope of royalty and technical services) to override Supreme Court rulings, further dampened investors' confidence in the Indian tax administration and has dented India's image globally. These amendments have left taxpayers with a sour taste in the mouth.

In its first Budget, the government just made a statement of intent that they do not encourage retrospective tax laws and formed a special committee to decide the tax cases arising out of retrospective amendments. As we head towards this year's Budget, the government is now faced with a dilemma of Hamletian proportions. The question is whether the government should do away with the power to tax retrospectively or retain it by justifying its use in the rarest of rare cases.

A specific provision prohibiting the retrospective amendments would give a very positive signal for investors that the government is looking forward for a stable tax regime. There are several countries where retrospective amendments are not possible and this is enshrined in the law (see table annexed). At the same time, political experts might look at it as a government bias towards the corporates as it would be a huge loss to the exchequer.

Taking a quick look at the legislative history, the Supreme Court has consistently held that a retrospective amendment must be reasonable and not excessive or harsh. It otherwise runs the risk of being struck down as unconstitutional. The Supreme Court has however upheld the right of the legislature to "cure" the statute so that it more correctly represents its intention. Such curative legislation does not in fact touch the validity of a judicial decision which may have attained finality albeit under the pre-amended law. Hence, the Supreme Court does not specifically prohibit enacting a retrospective amendment.

Further in economic laws, Courts have normally allowed greater latitude to legislature to enact retrospective amendments. Hence, it is unlikely that the Budget would bring in a specific proposal to prohibit retrospective amendments altogether.

However, one could expect that harsh retrospective amendments are made prospective in nature as it would send a strong positive signal to the investor community that India would normally not enact retrospective amendments.

Alternatively, certain parameters could be introduced for consideration of the high-level committee (set up by the government to scrutinize all income-tax cases arising out of the retrospective tax amendment) that only those cases where the intent was to avoid taxes should be picked up for further scrutiny

A country which is aspiring to take its place as one of the fastest growing economies of the world has to have stability, fairness and equity in its tax system and it is high time we brought in law which prohibits retrospective amendments that adversely affect the rights of a taxpayer or which allows retrospective amendments in rarest of the rare cases. This would go a long way in rebuilding trust and reputation of India globally. Because as William Shakespeare says "The golden age is before us, not behind us."

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