Forget the din about the retrospective changes to income tax laws to make Vodafone pay up about R12,000 crore. Hidden away in the Finance Bill is another killer amendment that will make the company pay, even if the Supreme Court gives it relief yet again.
The amendment gives the tax department emergency powers to override all types of court orders ? including from the Supreme Court ? in Vodafone-like cross-border transactions where the underlying assets are in India.
Tucked away as Clause 113 of the Finance Bill, the ?validation clause? says it will operate ?notwithstanding anything contained in any judgment, decree or order of any court or tribunal or any authority?.
Except in matters of national security, it is hard to imagine any chapter of Indian law where courts are shut out of executive action, as this ?validation clause? has done.
Put another way, the clause says in cases like Vodafone or SAB Miller where there is a change in ownership of capital asset in India because of sale of shares abroad, the tax department will have overriding powers to decide what to tax and courts cannot interfere.
So, any tax notice sent or even meant to be sent by the department in the past will be valid once this becomes law. Any such demand ?shall be deemed to have been validly made and such notice or levy of tax shall not be called into question?. The section goes on and on, eliminating possible objections to tax demands on a whole range of cross-border deals.
The possible reason why this clause giving absolute powers to I-T department was overlooked by tax consultants and lawyers on Friday was they were already spooked by the retrospective clauses that came earlier in the section ?rationalisation of international taxation provisions?.
PwC India joint tax leader Shyamal Mukherjee said the section makes it potentially useless for any company to consider moving a court for such cases, even if it feels it has a reasonable basis to argue a tax demand. ?Because even if they win there (in a court), the validation clause in the Income Tax laws will overrule the judgment,? he said.
A quick check of OECD practices showed there is no other comparable country which has given its tax department this type of total power. India has then earned a dubious distinction in this respect.
One of the chief features of Budget 2012-13 is that it has taken on several provisions of the Direct Taxes Code. It was expected that the changeover will make many companies and tax lawyers wince.
But this clause was an afterthought. It was not there in the DTC Bill and has obviously been brought in based on the Vodafone experience.
The larger risk of this provision is that if it runs unchallenged, the scope can be expanded later to other sections wherever the income tax department might feel it is facing difficulty in maintaining its tax demand.