The Finance Act, 2017 - Implications & Constitutionality?

INTRODUCTION

India's finance bill for the financial year 2016-2017 (the "Bill") was presented by the Finance Minister on February 1, 2017 and approved by the Lok Sabha with certain modifications on March 22, 2017. The Lok Sabha voted the Bill to be a money bill. 

Finance bills are legislative proposals presented in the Lok Sabha (India's lower house) before the beginning of every financial year and after the budget announcement for the next financial year. Finance bills essentially propose all the amendments to be made to various acts (such as the Income Tax Act 1961) to implement the budget in the coming financial year.

On March 30, 2017, the Lok Sabha rejected all the amendments proposed by the Rajya Sabha to the Bill and the same was sent to the President of India for his assent. The Finance Act, 2017 (the "Act") came into effect from April 1, 2017 after the President granted assent to the Bill on March 31, 2017.

In this article, we highlight the key changes introduced under the Act and its implications and analyze the legality of such changes.

KEY AMENDMENTS UNDER THE ACT

Broadly, the Act brings into force the mandatory requirement for unique identification Aadhaar registration, prohibits cash payments above a certain payment, merges quasi-judicial tribunals, restructures the appointment of members to certain judicial tribunals and amends the rules on the funding of political parties.

1. Mandatory requirement for Aadhaar: With effect from July 1, 2017, every person must provide a unique identification Aadhaar number ("Aadhaar Number") at the time of: applying for a Permanent Account Number ("PAN"); or filing of income tax returns. The key rationale for this mandatory requirement is to link the Aadhaar Number to individual PANs, preventing people from having multiple PANs and essentially rooting out tax evasion, create a watertight system for regulating the entire taxation system, making it easier to identify tax leakages or undocumented cash in India. On the other hand, development demands the expansion of the tax net. Currently, just 3 (three) per cent of India's population is estimated to file a tax return, which is woefully inadequate for the fiscal needs of a rapidly developing economy. From a public policy perspective, Aadhaar has a much greater penetrability amongst the masses when compared to PAN and making Aadhaar a mandatory requirement for tax filings should help track tax defaulters. Critics point out that biometric data collected by the Government, mandatorily required when applying for an Aadhaar Number runs the risk of being potentially misused or disclosed to unauthorized recipients.
2. Restructuring of certain tribunals: Pursuant to the Act, certain existing tribunals are to be restructured and merged. While several of these mergers appear to have merit on grounds of functional similarity, there are a few mergers, which might raise eyebrows. It's not immediately apparent, for example, why the Airports Economic Regulatory Authority Appellate Tribunal is to be merged with the Cyber Appellate Tribunal and the Telecom Dispute Settlement and Appellate Tribunal? Questions have also been raised on the constitutionality of merging these tribunals through a money bill.
3. Terms of service on various tribunals: Generally, service conditions of chairperson and members of various quasi-judicial tribunals were prescribed under relevant legislation establishing such tribunals. The Act, however, controversially amends such legislation, granting the power to the Government to make rules with respect to: (i) qualifications; (ii) appointments; (iii) term of office; (iv) salaries and allowances; (v) resignation; (vi) removal; and (vii) other conditions of service for members of such tribunals. These rules will be applicable to members of such tribunals, including chairpersons, vice-chairpersons and members, among others, of specified tribunals, appellate tribunals, and other authorities. Pursuant to these amendments the term of office for these persons shall not exceed 5 (five) years and such members shall be eligible for reappointment. The age of retirement has also been amended to: (i) 70 (seventy) years for chairpersons, chairmen or presidents; and (ii) 67 (sixty-seven) years for vice-chairpersons, vice-chairman, vice-presidents and presiding officers. Critics of these changes suggest that it gives unchecked power to the Government, entitling them to essentially install political appointees to govern such tribunals, arguably eroding the principle of the separation of powers between the executive, legislative and judiciary. This amendment could, therefore, potentially compromise the independence of such quasi-judicial tribunals. In this context, it should be noted that the Supreme Court of India ruled in 2014 that appellate tribunals have similar powers and functions to the High Courts in India, which include the power to appoint judges and determine the terms and conditions for such appointments, confirming the general principle of non-intervention by the executive. In this context, it should be noted that two petitions have been filed with the Supreme Court of India for the determination of the legality of the mandatory requirement of Aadhaar Number for tax filings, under Section 139 AA of the Income Tax Act, 1961. The Supreme Court upheld the validity of an Income Tax Act provision making Aadhaar mandatory for the allotment of permanent account number (PAN) cards and the filing of tax returns but imposed a partial stay on its implementation until a constitution bench addresses the right to privacy issue.
4. Donations made by companies to political parties: Earlier, the Companies Act, 2013 provided for a cap on the contributions made by companies to various political parties to the extent of 7.5% (seven point five percent) of the net profit of the last 3 (three) financial years. Further, a company making such contribution was required to disclose the contribution made along with the details of the political party to whom such contribution has been made. The Act, controversially, amends the Companies Act, 2013 to remove this cap of 7.5% (seven point five percent) and the requirement of disclosing such contributions made to political parties. The amendment is motivated by the Government's objective to carry out political finance reform, but the implications are significant: firstly, it entitles a company to make uncapped contributions to political parties (potentially leading to multiple political pressures to donate); and secondly, since companies making contributions are no longer required to disclose such contributions, the amendment, if anything, makes political financing less transparent. The amendment could lead to the creation of shell companies to channel undocumented money into the political and electoral process in India.
5. Cap on cash transactions: The Act introduces a cap on cash transactions above INR 2,00,000 (Indian Rupees two lakhs), this amendment is intended to curb large cash transactions from seeping back into the system and specifically curb large unaccounted cash transactions injected into real estate and gold bullion. We would query how successful the new restriction might be in preventing cash from seeping back into the black economy? How will it be monitored or policed, if the recipient of the cash does not necessarily have to deposit the proceeds into a bank account? Perhaps a more effective way of preventing cash from seeping back into the black economy post demonetization would have been to limit cash withdrawals from the banking system, forcing the uptake of internet-banking and other electronic methods of payment, leaving electronic signatures to the movement of large sums of cash.
6. Power to carry out search and seizures: The Act also controversially introduces sweeping powers to the authorities to conduct tax investigations. Earlier, the Income Tax Act, 1961 empowered the relevant authorities to enter and search any building, search any person or seize any documents if they had reason to believe that any person failed to produce certain documents or if any person was in possession of any money, bullion, jewelry or other valuable article and had failed to disclose such possession, or for any other reason provided under the Income Tax Act, 1961. The Act now empowers relevant authorities under the Income Tax Act, 1961 to carry out a search or seizure without having to declare reason to believe to such person or any authority or appellate tribunal, previously required under Section 132 of the Income Tax Act, 1961. Critics point out that this is a draconian amendment, raising fears that the relevant authorities may exercise an unchecked and arbitrary power to conduct investigations, leading to the risk of harassment and potential tax terrorism.
7. Power to impose the penalty: The Act also clarifies the power to impose a penalty. Earlier, the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996 were amended in 2004 to empower the adjudicating officer to impose penalties on offenders for various offences, including their failure to furnish information, documents or returns. The Act reinforces this power, clarifying that the adjudicating officer will always be deemed to have this power.

CRITICISM

1. On the one hand, critics point out that privacy is being further eroded by mandatorily requiring individuals to register for an Aadhaar Number. Many have questioned the integrity of the mechanism designed to keep individual data private, and to what extent the authorities should be able to monitor cash transactions by individuals.
2. Of critical importance, however, are the implications of the changes on the appointment of tribunals and the potential politicization of such future appointments. Increasing the role of the Government in such matters runs the risk of eroding the boundaries between the executive and the judiciary in particular.
3. Unencumbered and wide ranging powers given to tax officers and authorities under the Act could lead to the misuse of power, political witch hunts and the charges of tax terrorism, severely eroding confidence in the institutional process.
4. The real problems with these amendments are first, the seeming lack of application demonstrated in the drafting of the bill; second, the fact that the Centre is indulging in a naked power grab by usurping for itself wide ranging powers related to appointment, removal and qualification criteria of judges appointed to these tribunals; and third, the government is in effect firing judges from eight tribunals with a compensation amounting to just three months of salary.

CONCLUSIONS

The amendments under the Act have received a mixed response by the business, political and academic communities.