A roadblock to tax certainty

DISCRETION-BASED INTERPRETATION WEAKENS THE RULE OF LAW AND INVITES INCONSISTENCY

- ARBIND MODI

NARECENT address, the finance minister urged the Income Tax Department to implement the new Income Tax Act, 2025, in its “spirit”.

This implies a drift away from strict literal interpretation, raising a fundamental concern about the rule of law in taxation. While the sentiment may appear pragmatic, it sits uneasily with settled judicial doctrine and risks reopening the door to discretion, inconsistency, and uncertainty—precisely the infirmities modern tax reform seeks to eliminate. In a system that increasingly relies on self-assessment and voluntary compliance, such uncertainty can significantly alter taxpayer behaviour, risk perceptions, and user cost of capital.

Literal interpretation isn’t optional, it is foundational

The jurisprudence of the Supreme Court on statutory interpretation in law is consistent and unambiguous. Where the language of a tax statute is clear, it must be applied as written. Courts have emphasised that taxation is a matter of strict construction: nothing is to be read in, nothing implied. Both the taxpayer and the administration are entitled to rely on the plain meaning of law—and both are equally bound by it. This mutual reliance forms the basis of trust between the State and taxpayers, reinforcing compliance through certainty rather than coercion.

It is only when ambiguity arises—when two reasonable interpretations are possible—that one may turn to legislative intent or “spirit”. Even then, interpretative tools are applied cautiously, often with a bias in favour of the taxpayer. This clarity is the bedrock of fiscal certainty. Any suggestion that “spirit” should override text risks weakening predictability that is essential for compliance.

Where does the ‘spirit’ reside?