Tuesday, June 18, 2013

Sunset clause doesn’t need a road map to end tax exemption; Parliament has legislative powers to withdraw it

Amendments by Finance Act, 2011 to withdraw exemption from MAT & DDT to SEZ developers were not unconstitutional. The road map was not a condition precedent for the Parliament to introduce sunset clause.  The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment.

In the instant case, the petitioners were SEZ developers. They had borrowed massive loans from various financial institutions and made investments in land, buildings, infrastructure facilities, etc., and commenced their projects on the basis that income accrued or arising to them as SEZ developers would be exempted from MAT and DDT. The Union Finance Minister moved the Union Budget for 2011-2012 on the floor of Parliament and the Finance Bill, 2011 was introduced, in terms of which, a proviso was inserted to Section 115 JB (6) and 115-O (6), to withdraw exemption from MAT and DDT. Being aggrieved by the insertion of the above provisos, the petitioners filed the instant writ petition.

The High Court dismissed the petitions by holding as under:

1) It was a settled position of law that every tax exemption and incentive would have a sunset clause. Every fiscal legislation, providing for tax exemption must have a life span fixed in the enactment;

2) There could be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government, the impugned provisos were introduced restricting the exemption only for a particular period;

3) The impugned amendments were shown in the Finance Bill and were placed before the Parliament in the month of March, 2011 for the years 2011-2012;

4) The proposed amendments specified that the exemption from MAT would come to an end from 1st April, 2012 and exemption from tax on distribution of dividends would come to an end from 1st June 2011. Thus, the impugned amendments were prospective in nature;

5) The road map was not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. Thus, the instant writ petitions were  dismissed - Mindtree Ltd. v. Union of India [2013] 34 taxmann.com 250 (Karnataka)