Retrospective application of tax laws avoidable, says adviser

Tax Administration Reform Commission Chairman Parthasarthi Shome said retrospective tax laws should be brought in exceptional or rarest-of-rare cases, and with particular objectives.

 “Retrospective application of tax law should occur only after exhaustive and transparent consultations with stakeholders who would be affected and as a matter of policy the government should best avoid introducing fundamental changes in tax provisions without consultations and thus not be anticipated by the tax payer,” Shome, who is also an adviser to Finance Minister P Chidambaram said, after International Tax Conference organised by industry body Assocham on Monday.

Three conditions

He said three conditions which could be envisaged retrospectively are correct apparent mistakes or anomalies in the statute, apply to matters that are genuinely clarificatory in nature and protect the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax without economic substance.

 He, however, said the government should not go in for retrospective amendment of tax laws to raise revenue or expand tax base.

He was replying to a question whether retrospective amendment in tax laws had vitiated business environment in the country, particularly the one related to the tax dispute with the UK-based telecom giant Vodafone Group.

The British telecom major is facing a tax liability of over Rs 11,200 crore, along with interest, on its 2007 acquisition of Hutchison Whampoa’s stake in Hutchison Essar.
Vodafone had expressed keenness to reach an amicable settlement of the matter. Its India chief Analjit Singh had met Finance Minister P Chidambaram so as to settle the tax dispute through conciliation.

However, Shome said the government “cannot be blamed for retrospectivity and a balanced view is required in any such matter.”

He also conceded that the recent, relatively aggressive stand taken by Indian tax authorities while carrying out transfer pricing adjustments gave rise to taxpayer dissatisfaction and complaints.

“Taking into consideration the severity of tax payer response, the authorities introduced an advance pricing programme and safe harbour rules and announced the postponement of anticipated GAAR provisions while passing the onus of proof from the taxpayer to the officer, which is a major change,”  Shome said.

“These measures seem to be slowly bringing back the confidence of tax payers and investors and the final outcome are yet to be seen as a series of changes are yet to unfold,” he said.