Democratizing International Tax Law

By virtue of Article 73 of the Constitution, the powers of the Union executive are co-terminus with those of Parliament: in the absence of any legislation, the executive enjoys unbridled powers to assume international obligations sans Parliamentary approval. However, any international obligation, that comes into conflict with any law enacted by Parliament, must undergo domestic legislative processes to attain the status of law and become enforceable by courts of law. Article 253 of the constitution, which embodies the concept of dualism, considers international law and municipal law as two separate and distinct legal systems.

Pertinently, Parliament too has the power to enter into, and implement, treaties and agreements with foreign countries under Article 246 of the Constitution, read with Entry 14 of the Seventh Schedule. In some cases, Parliament may rightfully delegate the power to sign and implement international agreements to the executive. Double taxation avoidance agreements, or tax treaties, are a classic example of such delegated powers. Under section 90 of the Income Tax (IT) Act, Parliament has specifically enabled the executive to enter into, and implement, tax treaties.

If that is true, it would be a sequitur, that international obligations assumed by the executive in exercise of the powers delineated under section 90 of the IT Act must, therefore, be implemented in conformity with the express mandate of that section, and no derogation therefrom is constitutionally permissible. Section 90, which is titled “Agreement with foreign countries or specified territories,” has two limbs: firstly, it enables and empowers the Central Government to, inter alia, enter into an agreement with a foreign jurisdiction for the avoidance of double taxation of income and, secondly, it requires the Central Government to notify such provisions as may be necessary for implementing the agreement.

Admittedly, in Nestle SA, Parliament’s power to delegate treaty-making powers to the executive, or the Central Government’s power to sign tax treaties, was not in dispute. Assuming an international obligation and enforcing it in the courts of law are two entirely different things, however. A textual reading of section 90 of the IT Act reveals that a notification is required to give effect to any agreement relating to the avoidance of double taxation. The MFN clauses, inserted by way of protocols, seek to alter or vary the way in which income shall be taxed under the IT Act. Assimilating these clauses into the domestic tax law, sans notification, will fly in the face of section 90 of the IT Act.

In fact, unnotified application of an MFN clause would lead to chaos and uncertainty in the tax system: taxpayers or assessing officers may choose to apply or disregard the clause based on their own interpretation or understanding on whether the clause should be considered activated or not. This has absolutely no constitutional or statutory backing. More so, when the activation of the MFN clause is contingent upon the happening of a future event, as was the case in the present dispute. Of course, assuming an international obligation and then not being able to perform it domestically may make the executive diplomatically answerable to the concerned foreign tax jurisdiction. Also, an argument could be had on whether the executive may lawfully prolong the performance of an assumed international obligation - despite having the capacity to do so. But these are questions that were neither raised nor considered by the court.

Currently, India has over close to 100 tax treaties with foreign tax jurisdictions. Undoubtedly, these treaties facilitate mutual trade and investment, and help in relieving double taxation of income. However, tax treaties or protocols signed by the executive to alter or vary the provisions of the IT Act must withstand the rigours of the constitutional and statutory requirements. Importantly, courts must be cautious while judicially incorporating them into the domestic law, having regard to the doctrine of separation of powers. The Supreme Court’s judgment in Nestle SA must be welcomed for upholding this vital democratic principle that our constitution holds dear.

Shilpa Goel is an advocate in the Bombay High Court. Views are personal.