Retrospective Tax Legislation and ‘Small Repairs’

Vodafone case—which, of course, is
yet to be finally resolved—has triggered a debate in India about the legality
and propriety of retrospective tax legislation. Much has been said about the latter
but not very much about the former.

issue that is often contested in relation to legality is whether the
retrospective amendment is ‘clarificatory’. The reason this is important is not
so much to ascertain whether the law should be construed to operate retrospectively—that question arises only if
there is no express provision and one is seeking to rebut the presumption of
prospectivity—but because it has a bearing on the validity of the law. The
Supreme Court of India has called this the ‘principle of small repairs’ (the
phrase appears to have its origins in an article in the Harvard Law Review). I discuss the cases on this subject in greater
detail elsewhere ((2012) 5 SCC J-25)) but the underlying principle is essentially that it is easier to justify retrospective legislation if it simply confirms
what should always have been the reasonable expectations of taxpayers. The best
example (although not a tax case) is
Singh v State of Haryana
. In that case, the
State of Haryana passed a law seeking to disqualify those with more than two
children from contesting certain elections but intended to provide a one-year
amnesty. In the proviso granting the amnesty, the word ‘after’ was
inadvertently used instead of the word ‘upto’ with the result a candidate was
disqualified if he had more than one child until
one year after the amendment but not thereafter. This was obviously not
what the legislature had intended—and more importantly not what any candidate
could reasonably have thought it had intended—and legislation correcting the
error was construed to be retrospective by the Supreme Court. If it had been
made expressly retrospective, a challenge to its constitutional validity would
undoubtedly have failed.

of these issues—although in a different context—have been considered by the
English High Court in its recent judgment in
R (St Matthews (West Ltd)) v HMRC
in which retrospective tax legislation (something of a rarity in the UK) was
unsuccessfully challenged by the taxpayer. The
Act 2003
introduced what is now the ‘Stamp Duty Land Tax’ (‘SDLT’) regime in the United Kingdom. The
essential scheme of SDLT is that a certain percentage of the consideration is
payable as stamp duty on the sale of land used as a residence within the UK. When
the Bill was being debated, a concern was expressed about potential double
taxation if A enters into a contract to sell land to B, but B then (before
completion) assigns the benefit of the contract to C, in whose favour A
executes the conveyance. To avoid this risk, section 45 of FA 2003 provides
that SDLT shall not be payable if there is an assignment, sub-sale and
substantial performance of the original as well as the secondary contract.

intention of s 45, as Mrs Justice Andrews notes at [12], ‘was to place the
taxation burden on the person who is going to have the use and enjoyment of the
property.’ But a number of ingenious tax avoidance schemes were devised to take
advantage of this provision. One of these was called the Blackfriars scheme. Under
this, A and B would exchange contracts for the sale of property at market
value; B would agree to grant C
(normally a connected person) an ‘option’ to purchase the property on the date
when the original contract completes, for a price marginally higher than the
SDLT threshold but at a fraction of the market value. Both agreements would be
‘substantially performed’—the first contract by completing and the second by B
granting the option he had agreed to grant. It was said that s 45 therefore
applied and that this transaction was outside the SDLT regime.

were doubts about whether the Blackfriars scheme actually worked but the matter
had not been tested when Parliament enacted retrospective amendments making it
clear beyond doubt that the Blackfriars scheme did not work. The question
was whether this retrospective amendment could be challenged as contrary to
article 1 of Protocol 1 of the European Convention of Human Rights (‘A1P1’). A1P1 provides, in essence, that
every person is entitled to the peaceful enjoyment of his possessions of which
he may not be deprived ‘except in the public interest’. There was some doubt
about whether A1P1 was engaged (see [43]–[52]) but the interest in the case for
our purposes lies in Mrs Justice Andrews’ analysis of the position on the
assumption that it was. The two requirements for validly depriving a person of
his possessions are that the interference must be lawful and proportionate. Two
factors, in particular, persuaded Mrs Justice Andrews that this retrospective
amendment was clearly lawful and proportionate. First, a warning was given by
the Chancellor of the Exchequer in 2012 that the Government would use retrospective legislation to invalidate
any SDLT avoidance scheme in this specific context. Secondly, and especially in
the light of that warning and measures taken in relation to other SDLT schemes,
it could not be said that there was any legitimate expectation that this scheme
would succeed:

65. In my judgment none of these
arguments has any merit. In the wake of what was said by the Chancellor at the
time of the 2012 Budget, any person who was well advised and who gave even
cursory consideration to the issue must have appreciated that it was highly
likely that once HMRC became aware of a variant on an existing tax avoidance
scheme based on the transfer of rights rules in the FA 2003 which had been
rendered ineffective as from the 2012 Budget, it would take swift action to put
an end to the variant as from the same date.

was also suggested that Parliament had not enacted similar retrospective
measures to invalidate other SDLT
avoidance schemes and that it was unlawful to attack just the Blackfriars
scheme. This argument failed as well:

69. If
other tax avoidance schemes unrelated to SDLT were not the subject of similar
legislation it does not follow that there was anything arbitrary or capricious
about this legislation or about its operation. Mr Beal’s riposte to that
argument was that it is not open to the Claimants to seek to take advantage of
an alleged failure by HMRC to apply the (same) correct tax treatment to someone
else, because two wrongs do not make a right. I agree. Moreover since it is
incumbent on Parliament to make decisions based on relevant facts and
circumstances, no inferences can possibly be drawn from any decision not to
make anti-avoidance legislation retrospective in unrelated areas, in which the
relevant factors might well point towards a different conclusion being reached as
to the proportionality of that approach.

fundamental difference between
Vodafone and
cases of this kind—apart from the fact that Indian law arguably imposes greater
restrictions on retrospective legislation than does English law—is that there
was almost certainly a reasonable expectation that the transaction was not
taxable: an expectation which the Supreme Court confirmed was based on an
accurate analysis of the Income Tax Act, 1961, as it then stood. It is
difficult to see how the principle of small repairs is attracted: the amendment
appears to be neither repair nor small, notwithstanding its characterisation as
‘clarificatory’ in the Finance Act, 2012. But the case importantly illustrates
that retrospectivity alone is not enough: much depends on exactly what the
position was before the law was amended and whether a reasonable taxpayer would
have thought that tax was not payable.

About the author

V. Niranjan


    But the case importantly
    "illustrates that retrospectivity alone is not enough: much depends on exactly what the position was before the law was amended and whether a reasonable taxpayer would have thought that tax was not payable." UQ
    To supplement, with thoughts on some more intererstingly inter-related or – connected aspects/concepts:
    In one's perspective, the concept of 'retrospectivity' implies 'retroACTIVITY' (-activating); hence has tagged on to it the inherent but inescapable impediment, more often than not confronted with by the Revenue, how to give effect to anything which is such a change in law brought about. That mostly depends and is entirely left to be taken care by the so called 'machinery' provisions – in short,such as secs 147,154,263,251, 254.
    A brief study attempted on the mentioned area riddled with irresolute complexity is covered in, among others, the published article, -"INCOME-TAX ACT:RETROSPECTIVE AMENDMENTS (OF WHAT CONSEQUENCES?)- (2005) 3 Comp. LJ (pg. 24)
    Over to active / proactive law experts for an insightful exploratory exercise!

    (-may be contd.)

  • WRT the report in Business Standard,-
    Higher tax may not apply to debt funds redeemed before Budget

    As commented:

    The further clarification, as commended through the solitary thus far posted comment, in one's own independent thinking, may be regarded to make some sense, but not all the sense. For, in such matters, what is of more relevance is the law in force at the point in time when investor , going thereby, was influenced to make the investment. Should that be so,- subject to further detailed study, particularly by those investors/their professional tax advisers having close knowledge and experience, -it appears that the grievance aired against the implicit 'retrospective amendment' /its effect dating back has not been fully addressed and remedied.

    For that matter, on a quick study, there seems to be a few other instances of new amendments, -albeit going simply by the stipulated 'effective date' may be taken to be prospective, – might not really be so. For example, suggest to consider the effect / consequence of the amendment of section 54 and 54 F restricting the tax exemption only if 'new asset' is situate in India. On the other hand,also consider the unintended but just the opposite consequence of the prospective amendment, stated to be of a clarificatory nature, of the Proviso to sec 54 EC (1).
    May be contd.

  • To add, an Update Here (hyperlink) >

    Finance Ministry's Presentation On Changes To Service-tax Law In Budget 2012 on Useful Miscellania!

    More may follow !!

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