It will surprise you to know that, in the now infamous Castleton order, the Authority for Advance Rulings (AAR) chairman—and former Supreme Court Justice—PK Balasubramanyan ruled in favour of minimum alternate tax (MAT) being levied on Castleton, even though the government did not insist on it. This excerpt from the order will make my point clear.
“The applicant (Castleton) has argued that section 115JB (MAT section) applies only to domestic companies. The Revenue presumably in the light of an earlier Ruling by this Authority has not specifically disputed the claim of the applicant. But, when the question of construction of a statute is involved, it cannot depend on the stand of the parties. The statute has to be construed by this Authority.”
In two previous AAR rulings—Praxair and Timken—it was determined that MAT is not applicable on foreign companies that do not have a permanent establishment in India. But those two decisions from 2010 held little precedent value for Justice Balasubramanyan in 2012. In fact, he argued that an AAR ruling has no precedent value.
“It appears to me that the theory of precedents may not have strict application in proceedings before this Authority.
This Authority is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. This Authority is not subordinate to any High Court for even Article 227 of the Constitution to apply.”
This is an excerpt from the very same Castleton order that the tax authorities have been waving at foreign investors.
The AAR chairman refused to treat a previous AAR order as precedent and yet Revenue has devised an entire taxation policy around an AAR order … treating it not just as precedent but also as law! The AAR itself says its ruling is binding only on the two parties involved. The non-resident applicant who approached the AAR and “on the Commissioner and the income-tax authorities subordinate to him in respect of the applicant.”
So when did an AAR ruling become the law of the land? But the better question worth asking is: why did an AAR ruling become the law of the land?
Well, because the income-tax law, or rather the specific section (115JB) on MAT, says nothing about foreign companies. Here is the text from the income-tax Act:
“Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act … is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be … at the rate of 18.5%.”
So does ‘being a company’ include a foreign entity in India? Even one without a permanent establishment or in simple English taxable presence? Most tax consultants argue that only an Indian company or a foreign company with a permanent establishment in India would be obliged to compute total income as prescribed by the income-tax Act. And if a company cannot fulfil that part of the section, then how can the other part apply to it?
Revenue may or may not agree with this deduction. But what it cannot deny is that the law does not explicitly include or exclude foreign companies.
MAT was first introduced in 1983, then withdrawn, reintroduced in 1997 and amended in 2000, which is when Section 115JB was first introduced. The finance minister then was the BJP’s very own leader Yashwant Sinha. Maybe Arun Jaitley should ask Sinha whether Section 115JB was meant to apply to foreign companies in India, especially FIIs/FPIs? Because neither the 2000 Finance Bill not Sinha’s speech at the time throw any light on the matter.
When a law is introduced, why is it not clear who it will apply to? Why should there be any confusion about something as basic and essential as that? Tax foreign companies if you must … no problem there … but at least tell them about it, if not in advance, at the time of legislation.
If the government writes confusing law and then some 12 years later an AAR chairman disregards other AAR orders and interprets the law to mean a tax on foreign companies … then that is law by fluke! And tax by fluke.
Now compare this with how, say Britain, implements new tax provisions. This year, in a bid to fight base erosion, Britain brought into effect the diverted profits tax, or ‘Google Tax’ as some call it. The tax was first proposed in Chancellor Osborne’s Autumn Statement on December 3, 2014. The draft legislation was made public within a few days and accompanied by a one-page note that explains in simple language—who is likely to be affected, the policy objective, the operative date, the current law, the proposed revisions and the impact on the exchequer. All this a good four months before the tax provision was enacted in the Finance Bill 2015. Maybe you disagree with the tax, but you cannot deny this is a darned better way to do it than ours.
The other time we tried this tax-by-fluke thing, but with less success, was in the Vodafone case. Truth is, if an asset is in India, the country should have the right to collect tax on its transfer, even if that transfer is done via an offshore transaction involving shares of foreign companies. But the other truth is our tax laws never said so in any clear terms. And Parliament slept through the noughties, ignoring big global M&As and India’s deal-worthiness. So, when the Hutch-Vodafone deal happened, the tax department suddenly woke up to realise the transaction is offshore, the asset is onshore and the law is lacking. Principally, the tax department was right to want to levy tax—legally it had a weak stand, or an unclear one at the very least—and when it lost in the Supreme Court, it sought to ‘clarify’ the law to justify itself, and its past actions.
Which country clarifies a law some 50 years after it was passed? Worse still, it was a half-clarification!
Finance minister Pranab Mukherjee’s Finance Act 2015 included a ‘clarificatory retroactive amendment’ that brought to tax any transfer outside India that directly or indirectly derived its value ‘substantially’ from the assets located in India. But the Act forgot to define what ‘substantially’ means. The vagueness persisted till the Finance Act 2015 clarified it to mean at least 50% of the assets of the company must be situated in India. In short, a ‘clarificatory (retroactive) amendment’ in 2012 was unimplementable for three years till it was further clarified in 2015.
It has become India’s habit to write confusing laws. Laws that complicate, not simplify. Laws that need repeated amendments. And not because times have changed.
For 10 years we pondered over rewriting the company law. Then a draft law was in and out of Parliament for three years (2009-2013). After much contemplation and two references to the Parliamentary Standing Committee (headed by BJP’s Sinha), the Companies Act 2013 was passed by Parliament. It’s 2015 and the law has already been amended! In fact, right after the Companies Amendment Bill was passed by Parliament, the finance & corporate affairs minister Jaitley announced that he intends to constitute a committee to consider “another round of amendments” because companies “are feeling the pinch after it is being implemented.”
An amendment so soon is justified if poorly-worded phrases are being clarified or errors rectified. But this amendment relaxes a key provision relating to related-party transactions. And other proposed changes are to exempt private companies from several provisions of the Act.
The Companies Act 2013 has 470 sections versus some 650 sections in the 1956 Act. Much has been left to the Rules because Rules can be changed more easily than amending an Act. And the Rules have already been amended several times over in the last year. Now the Act has also been amended.
If it wasn’t sad, it would be funny, because the Companies Act 2013 has not even been fully notified yet. Half the sections are still inoperative.
So, it’s a half-operative, partially-amended Act—and it’s only been a year!
Menaka Doshi is executive editor at CNBC TV18.
Views are personal
(Equal & Opposite is a column that explores business practices prompted by legal & regulatory action and vice-versa)