Second slap: SC junks govt's Vodafone review petition

The Supreme Court delivered yet another slap in the government's face when it refused to entertain a review petition in the Vodafone Essar tax case.

This order has one immediate implication: since Vodafone had deposited Rs 2,500 crore with the government and the deadline for its refund expired on Monday, rejection of the review petition means this money has to be refunded.

It also has a corollary implication, since the Union Budget had proposed a specific provision to deny refunds in such cases, by inserting item 13 in the Finance Bill (Read Menaka Doshi's story here). The item reads:

Notwithstanding anything contained in any judgment, decree or order of any court or tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-Tax Act, 1961, in respect of income accruing or arising through or from the transfer of a capital asset situated in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground, including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-Tax Act, 1961 as amended by this Act, and the rules made there under and there shall be no liability or obligation to make any refund whatsoever."

Vodafone can now expect a biggish cheque from the taxman for the Finance Bill has not yet been passed, the deadline for refund is over and the review petition is trashed. AFP

Quite a mouthful, that. But Vodafone can now expect a biggish cheque from the taxman for the Finance Bill has not yet been passed, the deadline for refund is over and the review petition is trashed.

In January, the top court ruled that Vodafone - which acquired the Indian telecom assets of Hutchison Essar in an entirely offshore deal - could not be taxed since the laws did not explicitly provide for taxing offshore transactions.

To nullify that verdict - which could cost the exchequer Rs 35,000-40,000 crore in potential tax revenues from such deals - Finance Minister Pranab Mukherjee introduced specific provisions and "clarifications" in the law that were backdated to 1962 so that not only Vodafone, but many more such offshore deals can be taxed.

The government's logic, as explained by Pranab Mukherjee himself, is simple. Hindustan Times quotes his as saying thus: "India is not a no-tax country. It is not a low-tax country. If someone says I will not pay taxes, that will not be allowed. I cannot create a fiscal crisis."

Only a fool will deny the first two sentences: we are not a no-tax or low-tax country by any stretch of imagination. However, the FM is surely wrong to presume that Vodafone or anyone else has said it will not pay taxes. When has Vodafone said that? It is not paying taxes because the provisions for them don't exist.

As for the rest of the statement ("I will not create a fiscal crisis') - this is humbug. The fiscal crisis the FM is facing did not come from non-payment of taxes by Vodafone, but from its own inability to manage subsidies or rein in other kinds of populist expenditures.

In fact, the Vodafone deal of 2007 happened well before the Lehman collapse and there was no whiff whatsoever of a fiscal crisis back them.

In fact, the real truth is that the FM is trying to solve his fiscal crisis bytaxing Vodafone through a retrospective amendment of the law - a decision that has been widely criticised for the kind of wrong message it sends foreign investors, though retrospective laws are not unheard of in the Indian or international context.

However, the real issue is whether the government is repeatedly going to pass laws to nullify what the judiciary says is wrong in principle.

As Arvind Datar, a senior advocate, wrote in The Indian Express: "It would be a serious insult to the judiciary if the decision in every keenly contested case is set at naught merely because it is against the government. In no civilised democracy are retrospective laws made to nullify judgments year after year after year. There is no point in having an 'independent judiciary' where only decisions in favour of the state are respected and all decisions in favour of citizens are obliterated. We might as well amend the Constitution and declare that no court shall give any judgment adverse to the Central or state government."

In three months, the government has received two slaps on the same Vodafone case. When it legislates the changes proposed in the budget, it would do well to drop the retrospective part of the amendment relating to Vodafone and similar cases.

Who knows, it may be asking for a third slap.

Updated Date: Dec 20, 2014 07:09 AM

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