Financial Times

“Retroactive tax legislations enacted by any sovereign government are the weapons of mass destruction in the context of modern world economy,” said T. N. Manmohan, the president of the Institute of Chartered Accountants of India (ICAI). He made this observation while he was delivering a speech on taxation organised by the faculty of taxation of the Institute of Chartered Accountants of Sri Lanka (ICASL) recently.

Criminal laws should discourage crime. Fiscal laws should encourage the income and earning capacity of individuals and corporates.

Fiscal law should look at things positively to develop business performances rather than hindering it. Government cannot always defend retroactive tax legislation enactments.

The confidence of good tax payers and the business community is shaken by such acts. In the modern-day economy investors are not country specific, therefore when the government introduces retroactive legislation their confidence is shaken.

It will lead to foreign direct investment being diverted to other countries. In emerging scenarios, retroactive tax legislation should not hinder the stability of law and business activity.

Here are the salient features of Manmohan’s presentation:

A sovereign legislature has the power to enact prospective as well as retrospective laws. The power to make law includes the power to give retrospective effect. However, some times the constitution of a particular country may place restrictions on the power of parliament to make retrospective laws. For example, under the Indian constitution, article 20 places restrictions on the power of the parliament to make a criminal law with retrospective effect.

In other words, the legislature cannot make a retrospective penal clause.

It is a fundamental rule of English law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly at the time of the passing of the act or arises by necessary and distinct implication.

A retrospective operation is, therefore, not to be given to a statute so as to impair existing rights or obligations other than as matters of procedure unless those effects cannot be avoided without doing violence to the language of enactment. Before applying a statute retrospectively, the court has to be satisfied that the statute is in fact retrospective. The presumption against retrospective operation is strong in cases in which the statute, if operated retrospectively, would prejudicially affect vested rights or the illegality of past transactions, or impair contracts, or impose a new duty or attach a new disability in respect of past transactions or consideration already passed.

Where legislation does not contain specific words giving it a retrospective effect, the courts have the power to give it such an operation if it is a necessary implication from the language employed.

It cannot be an invariable rule that a statute could not be retrospective unless so expressed in the very terms of the section which had to be construed.

It is enough that the legislature has sufficiently expressed that intention. The courts must look to the general scope and purview of the statute and at the remedy sought to be applied and consider what was the former state of law and what was that the legislature contemplated. But a statute is not to be read retrospectively except in the case of it being a necessity.

Tax legislation is a policy matter and it is for parliament to decide the manner in which the legislation should be made.

There is no prohibition against retrospective legislation. The power to tax is a sovereign power and is legislative in character and it has to be exercised within the constitutional limitation.

Any modern tax legislation contains provisions for deductions, exemptions and relief to the assessees. It is not uncommon for many countries to use revenue legislations to achieve socially desirable goals. For that purpose beneficial provisions are enacted.

However, it is of utmost importance that some sort of continuity should be given to such provisions because sudden withdrawal would severely affect the profitability of the undertakings.

Provisions relating to the allowance of depreciation, investment, capital expenditure and tax holiday profits, etc., should have a thread of continuity and clarity. Without this it is certain that tinkering with the provisions without a proper basis will spell danger to the business.

In a concluding remark, he stressed that the successful implementation of tax legislation is defended via four factors. Firstly, the tax legislation or amendments should be fair and reasonable, and it should promote business activities positively. Secondly, there should not be any gap in the policy and implementation. Tax legislation should be implemented in a friendly approach.

Thirdly, the tax legislation should be given full awareness in the minds of tax payers and the general public. Finally, it is the responsibility of the government to ensure that the tax collected should be used in productive ways so that the taxpayers place confidence in the government and feel happy about how their monies are utilised.