Sovereign Right to Taxation

The Indian government recently decided to withdraw the retrospective taxation amendment in the I-T Act introduced in March 2012.

• The Indian government had in 2012 retrospectively amended the Income-tax Act.
• This was in response to a Supreme Court verdict, which had held that Vodafone cannot be taxed for a 2007 transaction that involved its purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion. sovereignty
• Sovereignty, in political theory, means the ultimate overseer, or authority, in the decision-making process of the state and in the maintenance of order.
• Derived from the Latin superanus through the French souveraineté, the term was originally understood to mean the equivalent of supreme power.
• Constitutional Sovereignty implies that the constitution is sovereign and supreme.

Sovereign Right to Taxation in India
• In India, the Constitution gives the government the right to levy taxes on individuals and organisations, but makes it clear that no one has the right to levy or charge taxes except by the authority of law.
o Any tax being charged has to be backed by a law passed by the legislature or Parliament (Article 265).

Taxation in India:
• Tax is a pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority, and that a tax is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority.
• Taxes in India come under a three-tier system based on the Central, State and local governments, and the Seventh Schedule of the Constitution puts separate heads of taxation under the Union and State list.
• There is no separate head under the Concurrent list, meaning Union and the States have no concurrent power of taxation.

Limitation to States Sovereignty:
• The two most used Bilateral Investment Treaties (BIT) provisions to challenge a state’s taxation measures are expropriation and the fair and equitable treatment provision.
o The tax should not be discriminatory and it should not be confiscatory.

How does scrapping retrospective feature help?
1. With the removal of the retrospective feature a clear and predictable taxation law and intent has been presented to the companies which are expected to structure their assets accordingly while doing deals hereon.
2. It also provides clarity for deals between companies of countries where these are not covered under any tax treaty benefits.
3. The companies stand to gain by withdrawing the litigation with the arbitration (for cases before 2012) and then there will be a refund of any taxes that have been already paid or refunded in respect of any demands that have been adjusted.

Way Forward
• India should exercise its right to regulate while being mindful of its international law obligations, acting in good faith and in a proportionate manner.

• Investor-State Dispute Settlement (ISDS) tribunals do not interfere with such regulatory measures. In sum, the debate never was whether India has a sovereign right to tax, but whether this sovereign right is subject to certain limitations.
• The answer is ‘yes’ because under international law the sovereign right to tax is not absolute.