Bad facts make bad law-case of retrospective tax law and anti tax evasionary measures

During his elective on Securities Regulation at IIM Ahmedabad, Prof Sandeep Parekh made an interesting point that bad facts make for bad law. In other terms, where the conduct of the parties to the case warrants a decision which is just yet contrary to the express provisions of law. In securities law, he gave examples of this from India and abroad. In criminal law also, the Nanavati case(where Captain Nanavati shot dead his wife's lover in a 'fit of anger' yet walked free due to jury sympathy and eventual Presidential pardon) was a classic case of this in my view, which lead to abolition of jury trial.

But what relevance to this post? Read the prebudget memorandums of industry associations/professional associations, and one thing often stands out-the plaint against retrospective tax amendments nullifying hard won court rulings, and also measures against tax evasion, that impose procedural burden and excessive withholding taxes. While one can sympathize with the affected parties, the fact remains that it is precisely the egregious conduct of the taxpayers/professionals, that leads to stringent law. The Statement of revenue foregone(presented annually in the Union Budget) proves conclusively that larger firms(as measured by pretax income) pay lower rates of tax. Whether this is the base effect or just effective tax planning is not clear, but one inference that can be drawn is that larger tax payers have the resources to engage the best hired guns to 'optimize' their tax liability, take aggressive tax positions, benefit from every loophole etc. And with the Supreme Court sanctioned tax planning(a position sought to to reversed in the proposed Direct Tax Code 2011), corporates can go about this with aplomb, and can even escape penalties as their issue is inevitably admitted by tribunals(which itself implies that IS debatable, thus no penalty under 271(1)(c)).  

So what does the revenue do? While they DO expose the draft tax law to comments at times, professionals do not have an incentive to report loopholes for plugging at that stage, rather they would want to benefit from the new business importunity therein of helping their clients. So when unintended tax benefits are taken, retrospective amendments are the only way out, especially for artful structuring and all. And while tax evasion measures may punish law abiding tax payers, the fact remains that left to their own devices, tax payers will have the incentive to bend the law just a tiny bit(especially given the new limits for tax effect below which appeal will  NOT be filed by Revenue in administrative/civil forums). Expecting taxpayers to be law abiding by choice AND having a self assessment regime, implies that penalties must be stringent to ensure compliance.

While this may not be the most optimal economic outcome in terms of compliance costs, such measures are necessary in an environment where taxbase is already very low. Else, we may end up in Greece like scenario where the number of luxury car owners far exceeds the relevant tax base!