Retro-active Legislation - The Weapon of Mass Destruction of Tax Legislation
My good friend and President of Institute of Chartered Accountants of Sri Lanka (ICASL) Mr. Yohan Perera, Vice President, Mr. Nishan Fernando, Chairman of the Tax Faculty, Mr. R.N. Asirwatham, Mr. Satarasinghe, distinguished special invitees and other ladies and gentlemen. It is my privilege to participate at this Oration and address on the topic “Retroactive Legislation - The Mass Destructive Weapon of Tax Legislation”. In fact I am pleased to note the ICASL has been organizing Orations on Taxation for over a decade and it has been my privilege to participate in the 11th occasion.
Introduction
Fiscal legislation in any country is fraught with controversies in view of the conflicting interest between the government and the tax-payers. The successful implementation of any tax legislation depends on fair and equitable approach adopted therein. Law cannot be static, although it is expected to be operational for a reasonable period of time and with certainty. Any amendment having the effect of unsettling the law, in all fairness should be with appropriate notice and without causing genuine hardship. The experience in many countries has been divergent in this context. Invariably, the power to enact legislation with retrospective effect is resorted to achieve the intention of the Government even in respect of pending matters. This leads to resentment among the tax-payers.
During the course of my oration, I propose to make an analysis of the scope, nature and implications of a retroactive legislation.
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Nature of Fiscal Legislation
Fiscal legislation of every nation is not easy to comprehend for many reasons. But one particular reason is that Fiscal Legislation is read by many interested groups such as the tax administration, tax-payers and the judiciary. The meaning or definition that is drawn by such reading varies from person to person, may be depending on the perception of the person. It is not surprising that tax legislation has been a subject matter of controversy, litigation and a subject matter of such orations, year after year. In mathematics, all of us would agree that if a=b and b=c it means a=c and nobody can have difference of opinion. But anything mentioned in literary form, not in mathematical formula cannot have the same precision or uniformity or harmonies understanding or construction eg. if I say, I like my wife and my wife likes her mother, it doesn't mean that automatically I like my mother-in-law. Therefore anything mentioned or expressed in literary form is bound to generate different viewpoints.
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Power to enact
Friends, we are here to deliberate on retroactive legislation. First and foremost, there are 3 players relating to taxation. First, the legislature, which formulates the policy, second, the executive that is the bureaucracy, who are expected to implement the legislation and third, the judiciary which may have to interpret if the tax payer agitates on the policy or the manner of implementation or when the Revenue department appeals against order in favour of an assessee by a lower forum.
As far as the legislature is concerned, it has enormous amount of powers to legislate tax law. The well-settled position is that the power to legislate also includes power to legislate law with retrospective effect. When the executive commits excesses, the tax-payer has the judicial remedy. If the judiciary examines the legislation and holds a particular piece of legislation as unconstitutional, then the provision can be struck down. What happens if a judicial pronouncement strikes down a provision of law or nullifies the provision of law? Is it open to the legislature to re-enact the law or make such amendment to the law so as to nullify the judicial pronouncement? This again is possible and plausible which implies that the judiciary enjoys independent power to examine the veracity or the tenability of a provision of law, the legislature also enjoys its own power to enact or modify or cure the defect in the enactment so as to make it applicable from inception and when that is being done, it shall have retrospective operation.
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Substantive and Procedural Law
For the purpose of our subject, we have to classify the legislation in two segments, one - the substantive law and the other - the procedural law. Substantive law is said to deal with the rights and duties of parties, obligations of the parties, while procedural law deals with the manner in which those rights and obligations or liabilities are enforced. What is the general understanding or perception about the retroactive legislation with respect to those two categories of pieces of law? When it comes to substantive law which affects the rights, liabilities or obligations of assessees, the general proposition is that such legislation or amendments are made prospectively or generally they are construed to be prospective in nature. However, where the legislature itself explicitly or by the language used indicates the provision to be operative from an early date, then it operates retrospectively. Otherwise the normal presumption is against the retrospectivity of an amendment to substantive law. But as against this, when there is an amendment made to procedural law, it can be made either retrospectively or prospectively. Even where it is made with prospective operation, procedural law change applies to pending proceedings. In other words, it is always presumed to be applied to pending proceedings unless otherwise specifically provided. Thus, the procedural law is inferred to be retroactive in nature applied on all pending proceedings unless otherwise made clear. So this is the distinction in principle when it comes to applicability of an amendment or a modification in the enactment when it comes to substantive law vis-a-vis procedural law. But it is too difficult to draw a demarcation as to what is substantive law and what is procedural law, when it comes to some of the provisions when it could be partly procedural and partly substantive. That is where the complication arises.
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Power and Scope
Let me highlight the power and scope of any legislature to enact retrospective law. The power to enact retrospective law is always subject to the parent law under which the tax legislation is formulated. For any country, the constitution is supposed to be the parent law and tax law is a subordinate legislation which cannot override the scope envisaged in the constitution law. In India, according to Article 20 of the Indian Constitution, the government cannot enact any retrospective amendment in the criminal law. There cannot be a criminal legislation enacted with retrospective effect. Following the same analogy, even in tax legislation, there cannot be a retrospective provision or amendment relating to penal clauses. Thus a provision imposing a penalty or initiating prosecution with retrospective effect is prohibited.
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Implications
Let me now consider the implications of a retrospective legislation. The judiciary has rendered a judgment on a particular provision in favour of the tax-payer. If the government retrospectively amends the law on the premise that the intention of that particular provision was not what was understood by the court, then the tax-payer stands to lose out on the issue concerned. A question may arise in this situation is it fair; is it justifiable and is it proper to make such a retrospective amendment? In such a case, if the assessee goes to the court challenging the validity of this retrospective amendment, the very same court would have to examine the tenability of the amendment on the basis of principles discussed hereinabove and then uphold it so long as it is not ultra virus the powers and scope. There is no vested right in favour of the tax-payer nor that the principle of estoppel is applicable to tax legislation.
When it comes to retrospective amendments what is the role of bureaucracy or the tax administration? Most of these amendments are originated based on field experience of assessing officers who find that the lacuna in a provision is abused and hence the loophole needs to be plugged. I remember Mr. Nani Palkiwala, a renowned Indian jurist used to mention that an assessing officer has to not only do a job but he also has to keep his job. Also, from the perception of an assessing officer to look at it, he has to ensure that no concession or deduction under any provision of the law is abused or misused. In fact, as for as tax legislation goes, an assessment function is a quasi-judicial action. When an assessing officer executes an assessment function, he is supposed to carry it out judiciously, whereby, one penny due to the exchequer is not foregone, and at the same time not even one penny more is collected than what is due to the exchequer. He must ensure that the scales of justice should neither be tilted in favour of the government nor in favour of the assessee and that is why it is called a quasi-judicial proceeding.
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Non-desirability of Retroactive Legislation
Government should not resort to retroactive legislation for the simple reason that it shakes the faith of the tax-payers on the legislation itself. It erodes the stability of the legislation for a reasonably good period and more importantly in the globalized scenario, in the present context where the investors are not confined to a country specific. The investments flow from different parts of the world. The investors’ confidence also may be shaken if there is an amendment which even if not retrospective but is retroactive whereby it has impact on past transaction. I will give a simple example. Suppose the legislature gives a concession or an exemption stating that for all industrial undertakings established in a free trade zone or an economic zone or an export zone, 100% exemption for the next 10 years is available. Based on this exemption, it is possible that industries have been established and started. Investment also have come across the globe based on the feasibility of the project which had taken into account cash accrual with no tax outflow for 10 years. In such a situation if that exemption is removed or withdrawn before the 10 years period is completed, let us say in the 6th year of an unit, you cannot say it is a retrospective legislation. But it has retroactive nature or effect on what has already been acted upon by the assessee. This affects the investors’ confidence in the legislation of that particular nation. In the emerging scenario, in the globalized context, emphasis is more to have stability in tax law and any government would do well not to resort to retrospective legislation or retroactive legislation which will unsettle the past plans and shake the faith as well as the sustainability of business activity.
A criminal law is meant to desist a person from committing a crime. The criminal law is supposed to be discouraging the commission of an offence. But fiscal law should not be enacted with such objective so as to discourage earning of additional income. It should promote and facilitate the earning capacity of a tax-payer and in the process enhance the share of revenue to the government.
Equity and taxation may not be friends, but may appear to be strangers as inferred in experience in implementation of many provisions. However, they should not be construed as enemies. Wherever feasible, tax legislation should be embedded with principles of equity and inspire confidence in the minds of tax-payers.
There is no principle of estoppel in tax legislation. A government can go back on what it promised. However, as mentioned above, it is not desirable to exercise this power quite often.
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