Friday, 23 March 2012

Boohoo, we didn't get to tax the Zoozoo - In other words, Union Budget 2012

So, the Government has decided to recover its $ 2 bn by acting like Paris Hilton - "I WANT IT, I WANT IT!!" The Budget for 2012-13 was announced a few days ago and it brought with it some a lot of stuff that qualifies as 'Braking News.' Although I have never had the pleasure of listening to Palkhivala's post-Budget speeches, I am sure he'd have quite a lot to say if he was still with us. Here goes:

1. Retrospective amendment to Section 9(1)(i) with effect from 1962 for bringing indirect transfers within its ambit

After IN-DEPTH analysis of the jurisprudence surrounding Section 9 (taxing income 'deemed' to accrue or arise in India), the Supreme Court categorically held that in its present form, it DOES NOT cover indirect transfers of a capital asset situated in India. The Supreme Court also said that if the Government wants to tax indirect transfers, it should enact a provision to that effect first. This is how the Government heard it - "So, all we need to do is get a time machine, go back to 1962 and insert suitable Explanations in order to bring indirect transfers within the ambit of Section 9. Easy-peasy! Thanks, Supreme Court, wonder why WE didn't think of this UNTIL NOW."

So, through Finance Bill 2012, not only did they enact a retrospective amendment, COMPLETELY disregarding what the highest judicial authority of the country has held (after extensive deliberation), but they also introduced a Validation Clause to tell the Supreme Court that its exercise was totally in vain. By way of this clause, any Court ruling can be nullified if it was pronounced on basis of the 'mistake in the law' which has now been 'corrected' by way of the retrospective amendment.

How ethical is this? While no one's challenging the Government's authority to amend law retrospectively, it ought to keep in mind that it has to play by its own rules. I recollect a statement made by the Supreme Court while staying the 27% OBC reservations in 2007 - "You cannot play the game first and devise the rules later." Instead of heeding the Court's advice, the Government has gone one step ahead this time. It has played by its rules, lost the game fair and square, gone back to the point before the game started and THEN changed the rules. While I'm not sure whether the retrospective nature of the amendment will be struck down, the Validation Clause definitely will be.

2. Retrospective amendment to Section 9(1)(vi) with effect from 1977 to bring within its ambit 'copyrighted articles.'

With the Delhi High Court upholding the distinction between a copyright and copyrighted article, and the Karnataka High Court rejecting it, a clarification in this respect was needed. But did it really have to be retrospective? I mean, common sense dictates that if you buy software when you walk into a store, you don't buy the COPYRIGHT in it, you just buy the damn software. You don't care how it works, as long as it serves its intended purpose. The amendment (in line with Karnataka HC) says that it doesn't matter whether you actually buy the copyright in it or not; for tax purposes, its royalty anyway. There's no distinction in paying for simply acquiring a software on a CD and paying for the right to OWN the copyright in that software. For tax purposes.

So wait, for COPYRIGHT purposes there's a distinction but for tax purposes, there isn't? *scratches head* B-but, shouldn't the definition of COPYRIGHT under the COPYRIGHT ACT supersede the definition under the Income tax Act, because you know, the former is where the CONCEPT actually COMES FROM? No such luck.

3. General Anti-Avoidance Rules:

While this doesn't affect Vodafone, it is another disrespectful piece of legislation. Only a few days before the Budget was to be announced, the Parliamentary Standing Committee on Direct Taxes Code submitted a detailed report to the Government. The report stated that the GAAR rules proposed in DTC needed substantial change. Again, COMPLETELY disregarding most of the Standing Committee's recommendations, Finance Bill 2012 has sought to introduce GAAR from April 2013, with an added insult to the Supreme Court.

CJI Kapadia in Vodafone's case had specifically stated that "every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit.”

Clearly displeased with this observation, the Finance Bill states that in determining whether a transaction lacks commercial substance, the following factors shall NOT be taken into account:

(i) the period or time for which the arrangement (including operations therein) exists;
(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;
(iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement

Moreover, SC has clearly mentioned that "the onus will be on the Revenue to identify the scheme and its dominant purpose." As per the proposed GAAR rules however, the taxpayer carries the burden of proof. What constitutes 'dominant purpose' has not been defined either. There are no provisions to protect the transactions ALREADY structured, as per the existing law (is it stable, is it not, is it stable, is it not).

On one hand - such blatant disrespect for the SUPREME Court (there's a reason why its called the SUPREME Court). On the other hand - Kapil Sibbal wants to censor social media. Are we moving towards anarchy?

4. Negative List for Service Tax:

I guess this isn't that bad a move. Except for the 2% hike. Only thing I'm wondering is, whether renting of immovable property could be considered a service. The matter is still pending before the Supreme Court. It would be interesting to see what would happen if the Supreme Court says it isn't...

One positive thing for salaried individuals is that the exemption limit is proposed to be raised to Rs. 2 lakhs.

While there are a horde of other changes, discussing all of them here isn't feasible. This article stemmed mainly from the outrage I felt at the Government's obstinacy. And I have spoken about that in detail. All in all, it is certainly a good time to be a tax lawyer, no matter whose side you're on. In the words of Palkhivala (what can I say, the man is a source of endless charm) - "To preach the virtue of stability to our Finance ministry is like seeking to preach the value of peaceful coexistence to Genghis Khan. Who has benefited from the chronic tinkering with the (Income tax) law, except lawyers and chartered accountants?"

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