International law, domestic procedure

People often believe that international law is not real law and is just a figment of a law professor’s imagination. Whatever might be the merits of this view, it’s certainly not true for situations in which international law impacts domestic legislation. Why should domestic law and international law interact at all, you might ask. It’s for the same reason why domestic commerce and international commerce interact in this globalised world.

But globalisation comes at a cost, which is that the same item of income might be taxed by two or more countries. Suppose an Indian company within a multinational group sends dividends to its American parent company. The American parent company will be taxed in India because the dividend is coming from an Indian source. The American parent company, since it is resident in the United States, will also be taxed on the same payment in the US. This is a fairly typical problem of double taxation and cannot be solved only through domestic legislation. Enter international law in the form of tax treaties.

India has agreed in most of its tax treaties to reduce or eliminate its tax on dividends paid out by Indian companies to their foreign parent companies, so as to reduce the incidence of double taxation on foreign companies. Here, international law does count for something, as it has tangible effects on taxpayers affected by Indian tax law.

But here, we arrive at a complication. The law that impacts taxpayers are instruments promulgated by Parliament. This stands to reason; parliaments are elected bodies tasked with enacting laws for citizens. How is it possible, then, for the executive – a set of senior officials in the government – to enter into an agreement with foreign countries that modifies the tax obligations as set by Parliament?

In some countries, it’s possible for international treaties to have a direct impact on the country, without the intervention of domestic law, but not in India. In India, the executive can enter into international treaties, but the treaty will have no effect domestically unless it is transformed into domestic law by Parliament. Section 90 of the Income Tax Act 1961 states that when India enters into a tax treaty with another country, it shall have the effect of modifying the tax obligation of persons to whom the treaty applies. However, the section also envisages that there is an official notification issued by the central government implementing the treaty. While the official notification appears to be a formality, it is in fact an indication of parliamentary intervention in the application of international law to domestic affairs.

The scope and impact of section 90 was considered recently by the Supreme Court in Assessing Officer (International Taxation) v Nestle. In some of its treaties, India has agreed to an MFN (Most Favoured Nation) clause in its tax treaties. This is like a generation of good tidings clauses. It states that if India enters into more favourable provisions in the future in tax treaties with other countries, it will be obliged to apply the identical favourable provisions to MFN partner countries as well. That’s the whole point of being an MFN partner. Similar MFN clauses are present in India’s WTO agreements as well.

But there’s a twist to this case. The government argued, and the Supreme Court agreed, that the MFN clauses will operate to bring more favourable tax treatment to taxpayers only if the government issues a separate notification under section 90 implementing the MFN treatment. Why so? Because only then will the legislative pre-approval loop in section 90 be completed. For non-lawyers, this appears to be an unnecessary bureaucratic complication, but for the Supreme Court, this was of capital importance.

This is one of those instances where the formality of the law becomes of great importance, and is one of those puzzling features of the law that annoys the public. Formalities in the law abound. Most property transfers require registration. Wills need a certain number of witnesses. Court cases require specific documentation. Why can’t the law be simpler? Unfortunately, the answer is complicated. Formalities serve various functions. Sometimes, they make evidentiary arguments about past events easier. Sometimes, as in the Nestle case, they are in the service of making sure international law applies in domestic law only after due deliberation. Often, formalities are meant to constrain arbitrary behaviour by government officials. Many tax collection proceedings have failed because the wrong official sent a show-cause notice. Formalities matter. To what extent is a discussion for another day.

(The writer is a law professor who thinks that the law is too important to be left to the lawyers)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.