Taxation Law

[By Devarsh Shah and Dharmvir Brahmbhatt] The authors are students at the Gujarat National Law University.   Introduction SPAC Listings have witnessed a massive global revival in recent times. With around 250 listings, SPACs raised nearly $ 80 billion in the United States in 2020 and has been growing since. Not just in the United States, but in India too, SPAC listings have resurged. Recently an Indian company, ReNew Power sought listing on NASDAQ through SPAC. Many others like Flipkart and Grofers are considering SPAC Listing in the near future. The sudden strong re-emergence of SPACs in India has ignited several deliberations in the legal fraternity. The biggest example of the same is the recent consultation paper issued by the International Financial Services Centre Authority (IFSCA) of India (regulator of the GIFT City International Financial Services Centre) which provides for SPAC listings in the IFSC. In essence, SPAC refers to a Special Purpose Acquisition Company which is a ‘blank cheque entity’ floated to raise capital through Initial Public Offer (IPO). It is essentially a shell corporation established with the sole purpose of acquiring an undisclosed operating company. After the IPO, a target is identified and with the approval of shareholders of the SPAC, it is acquired by way of a reverse merger, which is also called a de-SPAC transaction. A SPAC is preferred over a direct listing because it is a faster way of going public. Yet another significant reason for Indian companies is an easy access to foreign capital markets. While, at first, SPAC listings may seem to be very fascinating, the regulatory framework in India is not very conducive for the same. Restrictions contained under various FEMA regulations and RBI guidelines pose a severe threat to the viability of SPAC listings for Indian companies. To add to that, an SPAC listing entails a severe tax burden upon the Indian company and its shareholders. The present article makes an attempt to analyse tax considerations involved in an SPAC Listing.  The ensuing section deals with various tax implications for effecting a SPAC Listing of an Indian Company which is followed by a discussion regarding tax liability once a de-SPAC transaction is concluded. The concluding part of the article examines the economic viability of SPAC listings in light of the available alternatives for Indian companies. Tax Considerations in a SPAC Listing Capital Gains under Income Tax Act As noted earlier, a de-SPAC transaction in almost all cases is concluded by way of a reverse merger of the Indian Target with the SPAC entity. Since an Indian target company merges into the foreign SPAC entity, the merger is in the nature of a Cross-Border Outbound merger. While, in normal cases, mergers and amalgamations are tax neutral under the Income Tax Act, 1961, this is not the case for Outbound Mergers. Section 47 of the Act enumerates those transactions which are not regarded as a ‘transfer’ for the purpose of the levy of capital gains. Clause vi of Section 47 of the Act exempts any transfer of a capital asset by the amalgamating company to the amalgamated company provided that it is an Indian company. However, in a de-SPAC transaction, the amalgamated company in all cases would be a foreign entity and hence Section 47 will not come to the rescue of the Indian target. Furthermore, transfer of a capital asset below the stamp duty value shall attract the rigors of Section 50C of the Act. Hence capital assets ought to be transferred at a fair value, which, in almost all cases, would be higher than the cost of acquisition thereby attracting a Capital Gains tax. Even the shareholders of the Indian target are not spared. Section 47 clause vii exempts the transfer of shares in a scheme of amalgamation if the amalgamated company is an Indian company. Further, the minimum acquisition value of shares by the SPAC entity should be the fair market value of the shares of the Indian Target. If the acquisition value is less than the fair market value, then the anti-abuse provision under Section 50CA gets triggered. Fair Market Value is expected to be much higher than the cost of acquisition and hence there is a significant tax liability upon the shareholders of the Indian Target. Stamp Duty The Levy of stamp duty on mergers is perhaps another significant hurdle for a SPAC listing. As held by the Supreme Court in Hindustan Lever Ltd v. State of Maharashtra, it is the scheme effecting the merger (order of the court/tribunal) which is an instrument under the Stamp Act. It is not necessary that there is a real transfer of property. Furthermore, valuation for the purpose of stamp duty has to be determined on the basis of shares/other consideration to the transferor company (Li Taka Pharmaceuticals Ltd v. State of Maharashtra). Since a merger cannot be concluded without court approval, stamp duty is inevitably attracted. Therefore, even though, there is no real transfer of assets in a de-SPAC transaction, it is leviable to stamp duty. Tax Implications post de-SPAC transaction. Permanent Establishment and its Taxability Once the merger has been effected, the Indian target loses its legal identity and becomes a branch/permanent establishment of the SPAC which is essentially a foreign entity. The creation of a permanent establishment is one of the most critical facets of international taxation. As a general rule, the profits of a foreign company are taxable in India only if such a company has a permanent establishment in India. Further, the income attributable to only such permanent establishment is taxed. The definition of a permanent establishment can be made out by a co-joint reading of Section 92F(iiia) and 92F(iii) of the Income Tax Act which defines the term as a fixed place of business through which the business of the enterprise is wholly or partly carried on. As noted earlier, once the de-SPAC transaction is concluded, Indian Target loses its legal existence in India and hence becomes a permanent establishment of the foreign SPAC entity.

[By Devansh Jain and Vishal Marakana] The authors are students at the Institute of Law, Nirma University. In 2017, the Organization of Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) came up with an action plan to tax the companies which operate digitally in any country without having any actual physical presence in that country. The main aim was to tax the companies which transact digitally and avoid tax in the host country. Since, there was no appropriate mechanism, the concept of Equalization levy was introduced in India through the Finance Act of 2016, which targets companies operating digitally.  Although the Finance Act, 2016 (‘the Act’) introduced Equalization Levy only to target and tax the specified payments pertaining to online digital advertisements, in 2020, an amendment was made to the Act which expanded its scope immensely The broadened concept of Equalization Levy under this amendment stated that the consideration received/receivable by the E-commerce provider from services or products rendered by digital means will be taxed at 2%. The 2020 amendment was obscure and wide in scope, for which the parliament brought in various clarifications in the 2021 budget. However, those clarifications ramified the concerns over the amendment furthermore. In this article, we have discussed the issues with these clarifications to the amendment. Extensive and Inexplicit Clarifications The clarification regarding the ambit of equalization levy stated that the consideration received/receivable from E-commerce supplies or services shall include the consideration for the sale of goods or services irrespective of whether the non-resident E-Commerce Operator owns or provides them. This clarification crucially affects the non-resident E-commerce operators since now they are required to pay tax on the entire value of the goods or services, instead of the commission which they actually receive. Let us understand this with an illustration, an E-Commerce Operator based outside India is a platform to book movie tickets, which deducts 10% commission on each transaction. Now, a person books a ticket for a movie shown at PVR cinemas and pays INR 200 for the same. In this scenario, E-Commerce Operator’s commission is INR 20 and the Equalization Levy which is to be charged on the entire transaction value is INR 4. Hence, the E-Commerce Operator is charged with 20% of the commission earned by it. From the illustration made above it can be observed that the E-Commerce Operator is not exactly earning 10% commission from the transaction. This makes it burdensome for the E-Commerce Operator which merely acts as an intermediary between the customer and the service provider. Rationally, the charge on the entire value of goods or services provided through the E-Commerce Operator seems preposterous. Ideally, the Equalization Levy shall be levied only on the commission received by the E-commerce operator, rather than on the entire transaction value. The clarification is so ambiguous that the wording of provision “consideration received/receivable” creates a deeming fiction on the E-Commerce Operator to pay 2% of the Equalization Levy which might turn out to be unwarranted. In a situation where a transaction is made between two parties via a third-party application (messaging app/email), even if the third-party application is only acting as a communication channel and does not charge any commission, it would be liable to pay Equalization Levy on the transaction value. Ambiguity Regarding Approach to the Authority for Advance Ruling The Authority for Advance Ruling aids a non-resident in arranging his operations which are subject to payment of tax and facilitates in assessing the tax liability on future transactions. However, the Finance Act 2016, does not provide any provision regarding the Authority for Advance Ruling in the context of Equalization Levy. The clarification which amended Section 10(50) of the Income-tax Act, provides that, when tax is paid in the form of Equalization Levy, the assessee is exempted from paying any other tax under the Income Tax Act. Now under Section 10(50), a party might approach the Authority for Advance Ruling to determine whether it can claim an exemption under Section 10(50) or is subject to the provisions of Equalization Levy. On the contrary, Authority for Advance Ruling does not have any authority to adjudicate on the matters relating to Equalization Levy. Possibility of Double Taxation The provisions of the Equalization Levy were brought under the Finance Act, instead of the Income Tax Act, so that the party cannot claim benefits of the accommodating provisions of either the Income Tax Act or the Double Taxation Avoidance Agreements.  However, this action of the parliament has its own consequence; the claim for deduction against the tax obligation of Equalization Levy might be denied in a resident country of non-resident E-Commerce Operator, which would result in payment of double taxation by the E-Commerce Operator. Potential to Hinder Extra-territorial Operations The ambit of Equalization Levy is vast enough that it covers all the transactions which take place through an Indian IP address.  Cases wherein a non-resident transact through a non-resident E-commerce Operator using an Indian IP address can also fall within the ambit of Equalization Levy. Conclusion The Covid-19 pandemic has caused a huge disruption on the business entities, adding onto that, the extra burden of the Equalization Levy tax compliance will lead to the shifting of onus by the operators to customers. The Equalization Levy was introduced by OECD as a measure to collect the tax which was otherwise not collected, to formulate a system in which there are fewer deviations and fewer compliance costs, but due to lack of proper guidelines and clarifications, this has become nothing but an additional compliance cost for the E-Commerce operators. On one side, the Government wants to reel in foreign investment for which it has proposed various incentives, such as Special Economic Zones, exemption on the duty of import, income tax, and VAT exemptions, etc, on the other side, the Government has introduced Equalization Levy to charge tax on non-resident E-commerce Operators which is arduous, flawed and terribly irregular.

[By Sagnik Sarkar] The author is a student at the Tamil Nadu National Law University. Introduction In her 2019 Union Budget speech, Finance Minister Nirmala Sitaram announced the introduction of a ‘faceless e-assessment’ scheme in income tax matters, to curb unsavory practices which arise out of the physical contact traditionally required between the Income Tax Department and taxpayers in assessment proceedings. The highlight of this scheme is the elimination of the human interface through the use of technology: the Assessing Officer and the taxpayer will not interact with each other directly, and the identity of the Assessing Officer will not be revealed to the taxpayer. The scheme was given legislative backing through, amendments to the Income Tax Act, and the subsequent notification of the E-Assessment Scheme, 2019 under the newly inserted Sections of the Act. This scheme was met with widespread approbation and soon became quite successful. The success of the E-Assessment Scheme seems to have prompted the Central Government to extend the core feature of this scheme, the elimination of the direct human interface between the Department and the taxpayer, to other income tax proceedings. Through amendments to the Income Tax Act, and the subsequent notifications of the Faceless Appeal Scheme, 2020  and the Faceless Penalty Scheme, 2021 under the newly-inserted Sections of the Act, the Central Government has introduced similar mechanisms for dealing with statutory appeals to Appellate Commissioners and adjudicating penalties imposed under the Act. Now, in the 2021 Union Budget speech, the Finance Minister has made a commitment to introduce a similar faceless mechanism for the adjudication of matters before the Income Tax Appellate Tribunal (ITAT). A common, and central, feature of all the faceless mechanisms in question, the system of ‘dynamic jurisdiction’, seems to suffer from the vice of unconstitutionality due to manifest arbitrariness. The New System of ‘Dynamic Jurisdiction’ Until the introduction of the system of ‘dynamic jurisdiction’, assessment proceedings, appellate proceedings before Appellate Commissioners, and penalty proceedings, were required to be conducted by designated Department officials with territorial jurisdiction over the taxpayer in question. [i] The Central Government, by notifying the E-Assessment Scheme, the Faceless Appeal Scheme, and the Faceless Penalty Scheme, has now replaced this requirement with a system of ‘dynamic jurisdiction’. Under the new system, a computerized system randomly allocates every stage of an assessment proceeding, an appeal to the Appellate Commissioner, and a penalty proceeding, to different units across the country. It is no longer necessary for a jurisdictional Department official to conduct the proceedings in question. Hence, by way of example, it is theoretically possible, and quite probable, for the assessment proceeding of a taxpayer resident in Kolkata to commence at a unit in Delhi, continue at a unit in Hyderabad, and conclude at a unit in Chennai. Analogous factual situations can arise in cases of appellate proceedings before Appellate Commissioners, and penalty proceedings, too. This system of dynamic jurisdiction appears to fall foul of the constitutional guarantee of the right to equality before the law in Article 14 of the Constitution. The Constitutional Infirmity of ‘Dynamic Jurisdiction’ Earlier, under Section 256 of the Income Tax Act, 1961, Benches of the ITAT could statutorily refer questions of law arising in matters before it to the territorial High Court for adjudication. Now, decisions of ITAT Benches can be statutorily appealed to the jurisdictional High Court only on substantial questions of law, under Section 260A of the Act. Additionally, there is always the possibility of making a constitutional challenge to every stage of an income tax proceeding before the High Court. This has been confirmed by the Supreme Court in Nagendra Nath Bora (1958). Consequently, income tax proceedings, in various stages, are frequently challenged before the jurisdictional High Courts. This was recognized by the Law Commission in its 115th Report of Tax Courts (1986). Thus, the High Courts frequently express their opinion on diverse questions of Income Tax Law. The decision of a High Court, on a question of Income Tax Law, is binding on the income tax authorities within its jurisdiction: including Assessing Officers, Appellate Commissioners, and the regional Bench of the ITAT. This has been held by the Supreme Court in a number of cases, notably in East India Commercial Co. Ltd. (1962). Similarly, points of law in the decisions of regional Benches of the ITAT, and the Appellate Commissioners, are binding on income-tax authorities subordinate to them in their jurisdiction. This too is a well-established position of law confirmed in a number of cases, notably Kamalakshmi Finance Corporation Ltd. (1991). Thus, in summation, the decision of a High Court on a question of Income Tax Law percolates down and ultimately binds, every income tax authority within its territorial jurisdiction, including the regional Bench of the ITAT. In practice, High Courts frequently take contradictory views on the same, or similar, the question[s] of income Tax Law. This was very astutely recognized by the Law Commission in its 115th Report of Tax Courts (1986). Consequently, income tax authorities in one part of the country are bound to reach a different conclusion compared to their peers in another part of the country, on questions of law in respect of which the territorial High Courts in question differ. This practical reality creates a serious constitutional infirmity in the system of ‘dynamic jurisdiction’. Article 14 of the Constitution guarantees equality before law. In E.P. Royappa (1973) and Maneka Gandhi (1978), the Supreme Court has held that equality cannot co-exist with arbitrariness. Thus, it has been held by the Supreme Court in Shayara Bano (2017) and Navtej Singh Johar (2018), when a statutory provision is manifestly arbitrary, it will be unconstitutional. In Shayara Bano, the Supreme Court has recognized that the clinching indicator of manifest arbitrariness, is a distinction made without adequate determining principle. The system of ‘dynamic jurisdiction’ randomly allocates every income tax proceeding, and every stage of them each, to officials across the country. Randomness, by definition, is characterized by the lack of a determining principle. Hence, for no reason at

[By Yash Jain and Jaskaran Singh Saluja] The authors are students at the Institute of Law, Nirma University, Ahmedabad. Introduction The Income Tax Appellate Tribunal (“ITAT”) is referred to as the ‘Mother Tribunal‘ for being the oldest tribunal in the country. For years the ITAT has been discharging its role admirably and effectively. In view to transforming the taxation regime, the Commissioner of Income Tax (“CIT”) was made faceless. Subsequently, to reduce the cost of compliance, increase transparency and utilize resources efficiently, the Finance Bill, 2021 (“Bill”) proposes a National Faceless ITAT Centre. Clause 78 of the Bill shall be inserted by the Central government to dispose of appeals by the ITAT. The said clause seeks to amend Section 255 of the Income Tax Act, 1961 (“Act”) that provides for the powers and procedure of the ITAT. The amendment will impart greater efficiency, transparency, and accountability to eliminate the interface between the ITAT and related parties. That means all procedures relating to ITAT shall now be carried out electronically. The faceless ITAT could broadly accelerate the rate at which disputes are settled. Apart from saving time and expenses, this system will bring more transparency and speedy justice to the litigants. However, a deeper analysis reveals flaws in the design and implementation of the new arrangement. The Bill heralds in the appearance of the supposed faceless Tribunal. The faceless ITAT raises certain legal ambiguities and concerns for the taxpayers regarding the nature and working of the structure. In this article, the authors will discuss numerous incongruities enduring while the proposition of faceless ITAT comes into the picture. These inconsistencies include the violation of the fundamental rule of conducting oral hearings in ITAT, transgression of natural justice principle and ITAT being the final fact-finding authority. To conclude, the authors believe that such the proposition of establishing faceless ITAT is a serious attack against the autonomy of the judicial capacity. Discrepancies in the Proposition of Faceless ITAT a)    Oral Hearing as a Fundamental Canon The legal apparatus over the world are broadly categorized into two types, i.e., Common law system and Civil law system. The Common Law Nations emphasize oral hearings and evidence and rely on cross-examination of witnesses, whereas, the Civil Law Nations emphasize written communication and evidence during the proceedings. As traced from the evolution of the Indian legal society, India has embraced the Common law system from the pre-independence era, which consequently affirms the strong rationale and opinion of the Indian judiciary to prevail the oral hearing and cross-examination over the written procedure. The same is also held by the Supreme Court in the case of Byram Pestonji Gariwala v. Union Bank of India & Ors. Further, the faceless evaluation has an intrinsic issue of one-sided communication and the absence of interaction. It is apposite to say that written communications are made with a few presumptions that the receiver would comprehend what is tried to be told by the sender, as everybody evaluates his response based on his own grasp. This may create huge misunderstandings merely because of the inability to effectively explain a point of fact, whereas, in the case of oral hearings, it can be clarified through open discussions and thereby, consuming lesser time. Numerous landmark judicial pronouncements have upheld the significant value of oral hearing as a fundamental standard in our Indian legal system. In Naresh Shridhar Mirajkar & Ors. v. State of Maharashtra, the Constitution bench of nine judges of the Supreme Court has well-settled that “all the cases brought before the courts, whether civil, criminal, or others, must be heard in open court. A public trial in open court is undoubtedly essential for the healthy and fair administration of justice and also serves as a powerful instrument for creating confidence of the public in the fairness of Indian judiciary”. The bench further held that “public confidence in the administration of justice is of such great significance that there can be no two opinions on the broad proposition that in discharging their functions as judicial tribunals, courts must generally hear causes in open and must permit the public admission to the court-room”. The Apex court has also relied on the same rationale while passing the judgment in the matter of Pradyuman Bisht v. Union of India & Ors., wherein the court peculiarly directed the learned Additional Solicitor General to take up the matter pertaining to the installation of closed-circuit television (CCTV) cameras in the tribunals such as ITAT, where the open hearing takes place in the same manner as it happens in courts because the Tribunals stand tantamount to courts as far as the object of installing CCTV cameras is concerned. Moreover, in the P. N. Eswara Iyer v. The Registrar, Supreme Court of India, the observations of the Supreme court are a jewel in the crown. The court strongly affirmed that oral hearing is a judicial process in the Indian legal system that is actively functional when there is the presence of viva-voce and it weakens if presented in written or printed form. Therefore, the orality in proceedings cannot be offered a permanent holiday. Notably, Rule 29 of the Income Tax Appellate Tribunal Rules, 2017, clearly denotes that the suits before the tribunal shall be heard in open court and it’s on the discretion of the Tribunal to decide that the proceedings in the exceptional situation will not be heard in an open tribunal. However, by the introduction of faceless ITAT, what was earlier the exception will now be the rule. However, the proposed initiation of the national faceless ITAT has completely deviated from the well-established concept of the oral hearing in the Indian judiciary which will be rendered as a departure from the Common law tradition of the Indian legal system. b)    Contravention of Natural Justice Principle One of the most celebrated principles of natural justice is audi alteram partem i.e. no one will be judged without ‘fair hearing’. It has two facets: firstly, an opportunity to make a representation must be given,

[By Samridhi] The author is a student at Law Centre-1, Faculty of Law, University of Delhi. The Union Budget 2021-22 has brought with itself a further increase in the safe harbour limit provided to the real estate in instances where a sale is affected under the value which, as per Section 43CA and Section 50C, is ‘adopted, assessed or assessable by any authority of a State Government’ in order to pay the assigned stamp duty on the sale. Such a value ‘adopted, assessed or assessable’ is also known as circle rate or guideline rate. This is the Government’s third attempt to boost the real estate sector. The first such increase in the safe harbour was enacted by Finance Act 2018 by providing a safe limit of 5% through the amendments of Section 43CA and Section 50C. Finance Act 2020 increased it to 10% and the Finance Act 2021 has increased it further to 20%. Though the real estate sector is joyous at this gift from the Central Government but the celebration remains short-lived as the abovementioned safe harbour limit will only last until June 2021. The Government’s explanation behind bringing forth such increases is to provide an incentive to the middle class to invest in the real estate sector, hence, the cap of Rs. 2 crores have been imposed. But in such circumstances, it remains pertinent to analyse whether such amendments will truly bring forth the change expected in the short span of time or will it remain an empty promise. Background Section 43CA was brought forth by Finance Act, 2013, in effect since April 1, 2014. It provided that if an immovable property is sold below the circle rate for the purposes of stamp duty valuation, then the sale will be considered to be at the circle rate for computation of income under ‘Profits and gains of business or profession’. On the other hand, Section 50C was enacted through Finance Act, 2002, and in effect since April 1, 2003. This section provides a legal fiction whereby if an immovable property is sold below the circle rate then for the purposes of stamp duty valuation, the circle rate will be deemed to be the value of the sale. Both the sections were enacted by the government with an agenda of curbing the involvement of black money in the real estate sector, which continued to be in circulation through practices such as undervaluation of property and to seek an increase in revenue collection from the real estate sector. Given the volatile and diverse nature of the real estate sector, the State Governments were given the liberty to decide on the valuation of the property for the purposes of arriving at the circle rate, which is the minimum rate at which the property must be sold in a given area. This liberty has been exploited by the State Governments to invent their own formulas through Valuation Officer for deciding the circle rate and the ‘fair market value’, which remains the current market value for a property. This practice provided a huge disparity between the ‘fair market value’, decided by a Valuation Officer to be the actual market rate, and the ‘assessed value’. In some areas, the circle rate far exceeded the actual market rate while in some areas the circle rate remained far below the actual market rate. Though the liberty given to the State Governments was done in an attempt to accommodate the volatility of the real estate sector but the practice of reviewing such rates at a period of 3 to 5 years has led to the stagnancy of the real estate sector. Thus, in an attempt to energize the sector that the government initiated the reform in 2018 by providing a ‘safe harbour limit’. The limit denotes the breathing space to the sector as it provides them the much-needed elbow space to negotiate with the buyers. Analysis But the sections remain riddled with several other ailments which have led to an increase in litigation and undue hardships. A sale of immovable property involves a factual matrix that remains unique to each and every case. This uniqueness finds no accommodation in the provisions. It is a usual circumstance in our country where for the purposes of marriage or to relieve the debt on a family, the property is sold at any rate available to the seller. This provides the seller with a double whammy, as not only he is forced to sell the property at a lower price but, as per Section 43CA, he also bears the burden of being taxed for the differential sum between the circle rate and the transaction amount that he never earned. While Section 56(2)(x), which was enacted through Finance Act 2017, provides the same burden on the buyer, where the tax is levied on the notional value when the immovable property is acquired on a price below the fair market value price. The rigidity of the sections was noted by the Delhi High Court in CTA Apparels Pvt. Ltd. v. Govt. of NCT of Delhi Collector of Stamps, where the High Court stated that the circle rate is only a guidance and not the sole factor for determining the value of the property. Moreover, the circulation of black money in the real estate sector has not been curbed by these reforms/ This is due to the huge disparity in the market rate and the circle rate. For instance in the case of Delhi, the rates in areas such as Panchsheel Park, Vasant Vihar, et al remain below the circle rate and in other areas the rates remain far above the circle rate. The State governments such as Delhi & Maharashtra are beginning to take steps to help provide some leeway to the real estate sector by bringing in much-needed reforms through reduction of the circle rate or reduction in stamp duty value. This disparity in the prices in the same State only provides further evidence to the fact that the reforms have been

[By Samridhi] The author is a student at Law Centre-1, Faculty of Law, University of Delhi. Status Quo On 24 November 2020, the Allahabad High Court delivered a judgment on an issue involving the revocation of the registration certificate by the Assistant Commissioner because the assessee had failed to file the returns for a period of six months. The Court while ruling in favour of the assessee noted that the administration of quasi-judicial functions by the people ‘who do not have a legally trained mind’ had led to discharging of the functions in an arbitrary manner. The Court found that the Commissioner’s failure to verify the assessee’s claims that the returns were filed and the Appellate Authority’s admission that the averments made by the assessee could not be verified at the appeal stage was ‘manifestly arbitrary’ and ‘militates against the whole purpose of a statutory appeal’. The Court granted the assessee a cost of Rs. 10, 000 to compensate for the unnecessary harassment and wastage of financial resources. These observations merit serious consideration in the backdrop of the Government’s increasing inclination to expand the powers of quasi-judicial authorities and the Executive. This has led to an increase in the litigation at the doors of High Courts due to arbitrary orders being passed by such authorities which remain incongruent with established legal principles. This is evident through several High Court judgments where the lack of application of legal mind leads to a frequent overturning of the orders issued. A recent example can be noted through the Kerala High Court’s judgment in the matter involving the validity of the proceedings initiated under Section 130 of the Central Goods and Services Act, 2017 (“CGST Act”). The Court discovered that the notice issued by the Income Tax Department (“Department”) against Veer Pratab Singh did not show anything which could have suggested an intention to evade taxes. Despite the lacunae in the notice, the authorities rejected Mr. Singh’s contentions and confiscated the goods. The High Court found that the proceedings initiated by the Department were legally unsustainable as there was no evidence through Mr. Singh’s act or omission that could provide grounds for establishing an intention to evade taxes. This highlights the dismal failure of the Department’s proceedings and rulings. Deloitte had calculated that the Department is successful in only 11.5% of appeals, while the global average is at 65%. The resultant chaos in implementation of taxation statutes has made the assessees vulnerable to such arbitrary actions initiated by the Department under the boundless power which operates outside the purview of the Legislature. The vulnerability is demonstrated from the increasing arrests of the assessees under the CGST Act where the ambit of Section 69, which grants the power to arrest, has been exploited by the Commissioners to establish ‘reasons to believe’. It was reflected in the judgment pronounced by the Bombay High Court that a mere paraphrasing of the requirements of Section 41 of the Code of Criminal Procedure, which provides for the situations when such power to arrest may be exercised, will not be sufficient to form ‘reasons to believe’ and effectuate an arrest. While the lackadaisical approach towards constituting the GST Tribunal has robbed the assesses of an opportunity to avail a judicial mind on the validity of the orders. It compels the aggrieved assessee to go to the High Court which continues to suffer from a logjam thereby leading to prolonged pendency, to challenge the orders. Need for Review of the Executive Powers It is contended that the economic offenses are distinct in nature and a separate mechanism needs to be developed for their regulation. Moreover, the delegated functions to the Executive are necessary for a nation where legislative proceedings are repeatedly disrupted. Moreover, there is an urgent need to boost economic growth and attract investments to facilitate post-lockdown recovery and implementation of government schemes and initiatives. It is a well-established fact that the collection of taxes in the government’s coffers reflect economic prosperity. This prosperity can be achieved by providing certainty with respect to taxation provisions in order to attract investment and instill confidence in the minds of the assessees to pursue economic growth and profits without fear of harassment. The same has been reiterated by the Supreme Court through Justice Chandrachud where he stated that, “There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made with the expectation of consistency, uniformity, and certainty. To detract from those principles is neither expedient nor desirable.” But the Executive has been known to detract to principles which have been found to be undesirable, and such principles have found the assent of the appellate authorities in several instances where a wrong interpretation leads to a decision either in favour of the Department or a dismissal. In either circumstance, the assessee has to go to the High Court. A recent example can be found in the Allahabad High Court’s judgment which pronounced that a bare reading of Sections 73 and 74 of the CGST Act provides that a show-cause notice is mandatory to be served before determining the leviable tax on ‘deemed supply’ and the orders and arbitrary penalty amount were set aside. Besides, the disruption of legislative proceedings or the distinction of economic offenses cannot provide a ground for the Legislature to abdicate its responsibility of being diligent in executing its legislative functions and employ ambiguous and equivocal terms to provide a wide ambit of powers to the Executive to implement unclear legislative intentions. The interpretation of such statutory provisions only leads to a surge in the judicial burden as it increases the number of cases filed to seek clarification and resolution of disputes with respect to incorrect assessment. Moreover, tax certainty cannot be provided by ousting the inclusion of law members at the frontline through the establishment of the Board for Advance Ruling (‘Board’) in place of the Authority of Advance Ruling (‘Authority’). This initiative by the

[By Tanya Rathod] The author is a student at the National Law University, Odisha. Layers after layers of retrospection, judicial pronouncements, and amendments are the key to make any legislative policy a successful one. GST (Goods and Service Tax) regime is always on a path to unravel, widening the scope of jurisprudential interpretation. One such attempt was made by the Hon’ble Supreme Court of India recently, in the case of Skill Lotto Solutions v. Union of India[1]. The three-judge bench held that the levy of GST on Lottery, betting, and gambling is not in violation of any fundamental right. In doing so the court also said that such activities are ‘res extra commercium’; rendering such levy of GST on lottery, betting, and gambling lawful. The author in this article analyzes the skill lotto judgment to comprehend the sovereignty of the legislature in making the laws pertaining to taxation when the goods in question are not objects of private rights. Background The Apex Court was approached by Skill Lotto Solutions Pvt. Ltd. who was an authorized agent of sale and distribution of lottery in Punjab. The writ petition was filed impugning the definition of goods under §2(52) of Central Goods and Services Tax Act, 2017 (CGST) and notifications to the extent they levy  tax on lotteries. The writ challenged the practice of levying GST on lottery, betting and gambling on the ground that it is not only discriminatory but also violative of the Articles 14, 19(1)(g), 301, and 304 of the Constitution of India. Prior to the introduction of GST, through the One hundred and first Amendment in the Indian constitution, Article 246A was inserted which gave the Central Government or respective states the power to levy GST, in furtherance of which central and state legislations transpired. §2(52) of the Central Goods and Services Tax Act, 2017  defines ‘goods’ as, every kind of movable property other than money and securities but includes actionable claim.  However, it must be noted that the Entry III Schedule 6 of the 2017 CGST Act exempts levy of tax on all actionable claims meanwhile creating an exception for lottery, betting, and gambling. This exception with respect to lottery, betting, and gambling was challenged to be inconsistent with the jurisprudential rule of intelligible differentia under Article 14 of the Indian Constitution. The petitioner primarily contended that the definition of ‘Goods’ under §2(52) of the (CGST) Act is not inclusive of the lottery. Adjudicating upon the above contention as laid down in the petition, the Apex Court ruled the following. A. Conflict of Definition: The Crust of the Cake The petitioner challenged that the definition of ‘goods’ in the CGST Act 2017 stands in conflict with the definition given in the Constitution of India as under Article 366 (12) to include all materials, commodities and articles. The article thus fails to contain the term actionable claim rendering the levy of GST on actionable claims such as lottery, betting, and gambling unconstitutional. Reaching for the crumb of the cake, the court held that the power of the legislature to make laws under article 246A of the Constitution is plenary and the definition of goods so made under Section 2(52) of the CGST Act 2017 is ‘inclusive’ rather than restrictive in nature, making way for the legality of inclusion of lottery in the definition of actionable claims. The court relied on the case of Sri Krishna Das v. Town Area Committee, Chirgaon, which stated that- the legislature or the taxing authority determines the question of need, the policies and selects the goods or services for taxation and Courts do not have the power to review those decisions B. Reasonable Classification: The Frosting The petitioner called into question the discriminatory proviso under Item no. 6, Schedule III which creates an exception for the activities or transactions which are treated neither as the supply of goods nor supply of services to include all actionable claims; and on the contrary leaving out lottery, betting and gambling as taxable. It was contended that there was no intelligible differentia in including actionable claims like lottery, betting, and gambling for tax purposes when all other actionable claims are free from levy of GST. The Supreme Court in this regard stated that firstly, the activities of the lottery, betting, and gambling are res extra commercium i.e. things outside of commercial intercourse or the things which are not available for ownership, trade, or commerce. In the State of Bombay Vs. R.M.D. Chamarbaugwala and Anr the court said that; “activities of trade, commerce or intercourse doesn’t include activities which inherently promote the susceptibility of man towards earning money by chance and steer him towards losing hard-earned income which further gives rise to a state of indebtedness to be made the subject-matter of a fundamental right guaranteed by Article 19(1)(g).” Relying on the said judgment the bench in Skill Lotto case held that there is sufficient nexus for the legislature to levy GST on those who carry the activities which are inherently res extra commercium and such regulations with regard to levy of tax on gambling activities are primed keeping in mind the welfare of society as a whole. The idea of the makers of the constitution was in no way to promote gambling activities and in doing so, the levy of tax on such activities is clearly not in contravention to the doctrine of equality as laid down in Article 14 of the Constitution. In the case of State of West Bengal v. Anwar Ali Sarkar case, the court held that the differentia or classification must have a rational nexus with the object sought to be achieved by the statute in question. The reasonable classification of goods on the basis of what falls within the category of trade and commerce; and activities that do not trade and rather pernicious is justifiable. Consequently, it cannot be said that the exemption made for actionable claims from the tax net apart from three actionable claims; lottery, betting, and gambling is discriminatory

[By Neha Mehta and Mahek Shah] The authors are both students at the NMIMS Kirit P. Mehta School of Law. As a response to the outbreak of COVID-19, businesses across the globe have adopted digital models. ‘Digital India’, a government initiative, got a big boost with the demonetisation move four years ago. A 2019 report by the Ministry of Electronics and Information Technology (MeitY) in association with McKinsey & Co. predicted India’s digital economic value to surpass US$ 1 trillion by 2025. With the changing business models, value – creation is becoming less dependent on the physical presence of people or property. However, the current Indian taxation regime is based on conventional notions of physical existence and these concepts are now being challenged. The digitalisation of the economy is raising questions regarding the effectiveness of existing international taxation rules. The intergovernmental economic organisation, the OECD has expressed deep economic and societal impacts with rapid digitalisation and the absence of a global consensus on aspects of international taxation regulations which make a fertile ground for tax disputes. The business models are undergoing a complete technological revolution at full throttle while facing challenges with the effectiveness of outmoded global tax systems. Keeping these transformations in mind, the article canvasses the conflict between the existing  Indian taxation regime and the Equalisation Levy – a direct tax that is withheld by the service recipient at the time of payment to a non-resident service provider. Flashback: OECD’s Action Plan and India’s Equalisation Levy In 2015, the OECD and G20 nations concertedly aimed to come up with a global solution to specifically deal with tax challenges of the digital economy by the end of 2020. It was in the backdrop of the Base Erosion and Profit Shifting project (hereinafter referred to as the “BEPS Project”) that OECD released the Action Plan 1. Despite failing to provide concrete solutions, it has guided countries to structure their tax laws as per the changing digital landscape. Limitations of the existing Permanent Establishment rules (hereinafter referred to as the “PE rules”) and the ability of MNC’s to avoid taxes through profit shifting strategies create concerns for countries like India that follow source-based taxation. India is an active member of the OECD and has staunchly expressed the need to eliminate tax uncertainty and stimulate global trade. Drawing an inference from the 2015 Action Plan 1, India was amongst the first countries to implement the ‘Equalisation Levy Rules’ in 2016 (hereinafter referred to as “EL 1.0”).   Primarily, the imposition of this direct tax vide the Budget 2016 was limited to only non-resident companies engaged in providing digital advertising services and digital space. However,  the Finance Act, 2020 broadened the scope of Equalisation Levy 1.0 to contain all e-commerce supply of services known as Equalisation Levy 2.0 (hereinafter referred to as “EL 2.0”) Equalisation Levy 2.0: What does it seek? Unlike EL 1.0 that sought to uprightly tax online digital advertisement services at a rate of 6%, EL 2.0 imposes a 2% tax on e-commerce operators for supplying or providing services over INR 2 Crores: i. Indian Resident; ii. Persons availing online services using an Indian IP address; iii. Non – Residents in the following cases: Only those sales of advertisement services that target a resident of India or a user having IP address located in India. Sale of data that is collected from a resident of India or a user having IP address located in India. Challenging the Status Quo The introduction of EL 2.0 certainly is a step in the right direction. However, the expansion in its scope poses numerous challenges. a. Lack of Clarity on Definitions EL 2.0 fails to explain several terms such as “operate,” “digital,” “electronic facility,” “platform,” “online sale,” “goods” and “online provision of services” that are mentioned in the statute. This creates room for wide interpretation and could be disputable. For instance, situations where sales could be concluded online through emails or messages but the deliveries are undertaken in an offline mode. The failure to define terms like “online sale” creates confusion in determining whether the levy would have applicability to a combination of online and offline sales. Therefore, it is unclear if the levy is applicable on every transaction with a component of digital dealing. b. Impediments with Extra-Territorial Application As per  Section 92F(iii)(a) read along with Section 92F(iii) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreements (hereinafter referred to as “DTAAs”), non-resident entities need to generate profits that can be attributable to a fixed place of business or demonstrate sufficient business connection in India for their income to be assessed in India. However, owing to the digital economy, it has become difficult to show a PE of business models that relies on intangibles such as cloud- computing, algorithms, etc. They have enabled the capability to conduct business through foreign jurisdictions. Therefore,  concepts like Place of Effective Management (POEM) that are based on corporeal and tangible aspects have now proved to be redundant. In its Action Plan 1 Report, the OECD identified three plausible options amongst which was to establish nexus through Significant Economic Presence (hereinafter referred to as “SEP”). Despite deferring the applicability of SEP in India, it may prove ineffective due to the treaty override. c. Fiscal Shortfall The committee on Taxation of E-Commerce headed by Chairman Akhilesh Ranjan, Joint Secretary (FT & TR-I), CBDT, Department of Revenue, Ministry of Finance released a report in 2016. The report highlighted fiscal constraints on governments due to violation of tax neutrality. Fiscal deficits are often reimbursed through local residents who pay increased taxes on income earned, goods and services, etc. This adversely impacts businesses and disrupts the existing market equilibrium. d. Characterisation of Income Firstly, there is a possibility that transactions may be assessed as Royalty/ Fees for Technical Services (FTS) / Fees for Included Services (FIS) by the Assessing Officer in a tax audit, much after the payment of the Levy. As the Levy falls outside the ambit of