draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation

Here is the brief introduction on draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation

Vide Finance Act, 2012, certain retrospective amendments were made in Income-tax Act, 1961 (hereinafter referred to as the Act), intended to clarify and restate the legislative intent of the source rule of taxation for nonresidents in India. In particular, they addressed situations where transfers took place exclusively between such non-residents—hence indirectly—of underlying assets in India.  The relevant section 9(1)(i) of the Act became effective retrospectively as of 01 April 1962.

The language and scope of the amendments led, however, to apprehensions about the certainty,predictability and stability of tax laws in India. The legislation with retrospective application in particular obviating an earlier Supreme Court decision on the matter of indirect transfer was not expected and thus perceived in negative light.  The present Committee was mandated to analyze the amended provisions. Based on inputs received from various stakeholders and the Committee’s own analysis, the Committee is of the view that, as a matter of policy, Government should best avoid introducing fundamental changes in tax provisions without consultations and thus not anticipated by the taxpayer.  

The adverse reactions to the amendments intermingled the two matters— retrospectivity in tax law, and indirect transfer—under the same rubric. This Report has attempted to untangle the two aspects.  It addresses the issue of retrospectivity and prospectivity.  It then proceeds to make a series of recommendations, including some that would apply if retrospectivity is opted for by Government, and others that would apply in either case. 

The Committee concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectives: first, to correct apparent mistakes/anomalies in the statute; second, to apply to matters that are genuinely clarificatory in nature, i.e. to remove technical defects, particularly in procedure, which have vitiated the substantive law; or, third, to “protect” the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without  economic substance, but not to “expand” the tax base.  Moreover, retrospective application of a tax law should occur only after exhaustive and transparent consultations with stakeholders who would be affected.

The entire draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation is on www.incometaxindia.gov.in