Apply tax law prospectively, recommends Shome panel

In a recommendation that could give relief to companies like Vodafone, a Government-appointed committee today favoured prospective application of tax law and waiver of interest and penalty in case of retrospective application.

"...the provisions relating to taxation of indirect transfer as introduced by the Finance Act, 2012 are not clarificatory in nature and, instead, would tend to widen the tax base ... these provisions, after introducing clear definitions ... should be applied prospectively," said Parthasarathi Shome panel's draft report on retrospective amendment relating to indirect transfers.

Prospective application of tax laws, the committee said, "would better reflect the principles of equity and probity in the formulation and implementation of commonly recognised taxation principles".

In case the government opts to apply the law retrospectively, the Committee said, it should waive interest and penalty.

Shome later said that several countries refrain from changing tax laws with retrospective effect.

Finance Minister P Chidambaram had asked tax expert Shome to look into the retrospective amendment to tax laws which had evoked sharp reaction from the international business community.

The then Finance Minister Pranab Mukherjee had sought to undo the Supreme Court judgement in the Rs 11,218-crore tax case which went in favour of Vodafone by making changes in the IT Act with retrospective effect.

The Income Tax Department had originally raised a demand of Rs 7,900 crore on Vodafone on its acquisition of Hutchinson's stake in Hutch-Essar through a deal in Cayman Islands in 2007.

Chidambaram had earlier said that he would like to settle all tax disputes both anticipated and pending.

Welcoming the recommendations in the Shome panel's draft report, industry body FICCI expressed hope the suggestions would lay down ground rules for retrospective tax laws.

"It is hoped that recommendations would bring about a much needed certainty in the tax policy and would lay down the ground rules for retrospective legislation in tax matters in future," chamber's President R V Kanoria said in a statement.

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