The government of India is asking Parliament to approve a retrospective amendment to the income-tax laws. Its aim is to pass law that would negate a comprehensive defeat of the government's stance against Vodafone Plc. in the Supreme Court.
Retrospective amendment of tax laws, by itself, may not be unprecedented for this government -in 2005 the government used its law-making powers to effectively settle an excise dispute with ITC Ltd. despite a comprehensive loss in the Supreme Court. Both the government and ITC had filed appeals in the Supreme Court against a decision of the indirect tax tribunal. The government was to refund ITC Rs 350 crore. The government promulgated an Ordinance with retrospective effect to negate the victory that the courts had granted to ITC.
When Parliament is not in session, the President of India, the titular head of the government, has the powers to promulgate an Ordinance to make temporary law in areas requiring immediate attention. Such law holds good until six weeks after Parliament reconvenes. During this period, Parliament may pass an Act to make the law permanent or reject the law. If no action to convert the Ordinance into a permanent Act of Parliament is taken, the Ordinance lapses.
The retrospective Ordinance pushed ITC to settle with the government. It allowed the government to retain the Rs 350 crores that ITC had already paid. The government then let the Ordinance lapse, so that ITC could keep the balance of the Rs 850 crores that the government was claiming from ITC. The then finance minister's defence was two-fold. He said his government only inherited the tax dispute - the Supreme Court had concluded hearings before UPA-I took office - and that the settlement was but modeled on the lines "suggested" by the Supreme Court when it concluded the hearing.
The conduct of the government, however reprehensible it looked then, now looks majestically elegant. Today, the government has comprehensively lost an income-tax dispute with Vodafone Plc. Vodafone did not deduct tax at source when it paid for purchase of shares of a foreign company, which in turn, indirectly held shares in an Indian company. The tax law, unlike the takeover regulations, did not state that such an indirect acquisition of shares in India would be a taxable event. The Supreme Court ruled that in the absence of an explicit provision, a transfer of shares of one company could not be regarded as an indirect transfer of shares of another company held by it.
UPA-II, perhaps having tasted blood with ITC, has adopted an even more sinister approach. More sinister because it is asking Parliament to amend the law to provide that at all times, every indirect transfer could be regarded as a taxable event.
First, this would enable the government to chase Vodafone all over again, despite having to refund the money "obeying" the Supreme Court's order for now. It would also enable the government to chase the entity that sold shares to Vodafone to pay capital gains tax to the government. So far, Vodafone has been at the receiving end for allegedly failing to deduct tax before paying the seller, what the government would do to the seller has not been the centre of attention. With ITC, the government in fact let the Ordinance lapse and did not abuse the situation for the entire market. The proposed amendment would enable the government to chase every single transaction that took place, even before the government adopted this stance (it was the size of Vodafone's acquisition that tempted the government to test this proposition), and re-open cases against tax assessees.
Second, the dispute with Vodafone was not inherited by the UPA at all - it was conceived, delivered and handled entirely by the UPA. In contrast, the ITC dispute was a seventeen-year long litigation, spread across three governments - the United Front, the National Democratic Alliance and United Progressive Alliance. That some parties have held office in each of these coalitions is a separate matter altogether.
Third, changing the rules of the game substantially on a retrospective basis is just not cricket. It is like declaring in a cricket match that has concluded that a batsman who had been caught behind off a no-ball would still have to be out, and all the runs he scored after that delivery be ignored, to hand over victory to the side that lost.
The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own. He can be reached at somasekhar@jsalaw.com
