One of the more egregious aspects of this year's Budget is the increase in the discretionary powers of the taxman and the changes in the tax law made with retrospective effect.
The government has sought to clothe these changes in the garb of clarifications and "rationalisation and simplification of administrative and compliance procedures". The courts have had mixed views on the subject.
While there are enough rulings allowing retrospective amendments, there have also been a few against this practice -- in 1985, a five-judge Supreme Court bench, including the then Chief Justice YV Chandrachud and Justice PN Bhagwati, ruled against retrospective changes, which had a tax impact.
The best example of how sweeping the taxman's powers have become is the amendment, under the "rationalisation" sub-head, to Section 271(1) that deals with penalties.
For instance, if the taxman disallows marketing expenses of Rs 50 crore (Rs 500 million), the assessee will in the ordinary course pay the tax and interest due on the sum. If, however, it is considered a case of willful misrepresentation, the assessee can also be liable for penalties of 100-300 per cent.
Under the current law, the taxman has to record his reason for believing there this is willful misrepresentation before penalties can be levied -- a detailed statement on the reasons has to stand up to scrutiny, including in court. What is now proposed is that the assessment order which disallows the expenses and asks for extra tax is deemed to be enough, and the taxman can decide if you have to pay a 100-300 per cent penalty or not.
The assessee can still challenge the order, but the payment of penalty will have to be upfront. What is worse, this amendment goes all the way back to April 1, 1989. It is not difficult to imagine the scope for harassment if, each time the taxman adds back expenses into an assessment, he automatically has the power to penalise taxpayers.
Section 115JB, which deals with the minimum alternate tax (MAT), has similarly been "clarified" with effect from 2001 (when MAT was first brought in), to include deferred taxes.
Tax experts say that one should expect IT/ITeS firms, who have so far not been paying taxes but report deferred taxes as part of their US GAAP requirements, to get notices under this amended section. There is also what is come to be called the Vodafone clarification -- Section 201 on deducting tax at source has been amended from June 1, 2002, to strengthen the taxman's case against Vodafone for not deducting tax on the payments it made when it bought Hutchison's stake in the Indian company.
Even more curious is the amendment made to Section 80-IB (9), though this does not fall in the category of retrospective amendments. This deals with the 100 per cent tax deduction of profits from commercial production or refining of mineral oil. Currently, this includes petroleum and natural gas production, but both now stand excluded from the section.
So, petroleum and natural gas will be classified as mineral oils in other places but not in 80-IB (9), which affects their taxation. As the Budget's explanatory memorandum puts it, "For the purpose of this section, the term 'mineral oil' does not include petroleum and natural gas, unlike in other sections of the Act."
An interesting aside is that there is no mention of this in the Finance Bill itself, though the explanatory memorandum is supposed to explain the provisions in the Bill.
Given the government's predilection to clarify/amend laws to the disadvantage of taxpayers, and to do so with retrospective effect, the courts need to take a fresh and comprehensive look at the legal validity of this practice.