The retrospective legislation in the Vodafone case has got more attention than hundreds of such cases in the past. Tempers and sentiments have almost reached a stage of hype. Logic is proportionately less. Some of the criticisms have been expressed in terminologies of cricket (roll back hundred centuries made by Sachin) and of Hindi Cinema (picture abhi baki hai, mere dost).
Serious arguments fall in the following categories which are discussed below.
Legality
Only three out of seventeen retrospective amendments in this Budget for direct tax have gone against taxpayers. But critics only target this amendment . So let us see what the amendment is. Section 9 of the Income Tax Act provides for cases of income which are deemed to accrue or arise in India. This is a legal fiction created to tax income which may or may not arise in India and would not have been taxable but for the deeming provisions created by this Section. Sub-Section (1)(i) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. One of the limbs of clause(i) is income accruing or arising directly or indirectly "through" the transfer of a capital asset situated in India. The legislative intent of this clause is to widen the application as it covers incomes, which are accruing or arising directly or indirectly. In the case of Vodafone, the Bombay High Court held in favour of Revenue that an indirect transfer of asset will attract income tax in India. The Supreme Court set aside the order of the High Court. The amendment that has been proposed in the Budget is, inter alia, to amend Section 9(1)(i) to clarify that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". Amendment has also been done of Section 9(1)(i) to clarify that an asset or a capital asset being any share or interest in a company registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Thus the amendment is not only expressly clarificatory but even expressly retrospective. This is perfectly legal by all judgements of Supreme Court.
Unjust
It has been pointed out that retrospective amendment has been unjust and immoral, even if legal. The Supreme Court itself has not entertained the argument about "just and reasonable" when the amendment is otherwise valid (Lohia Machines vs. UOI). There is no morality in law so long it is not oppressive or confiscatory to such an extent that it violates the fundamental rights in the Constitution.
Time bar
Fairness is also provided by time bar. It is only theoretical that the law has been amended from 1962. The normal time bar will apply for raising demand, held the Supreme Court in several cases (notably Mafatlal Industries vs. UOI - 1997(89)ELT247(SC).
Rule of law
Criticism has been made even by famous magazines (Economist, March 24) that the amendment has "eroded the Rule of Law". The position is precisely opposite. The law has to be first determined. The normal process is through High Court (which is pro Revenue) and Supreme Court (which is against Revenue) and statutory amendment. This happens every year not only in India but in many countries. This normal process is a part of Rule of Law.
Stability
The criticism that the amendment has led to instability is totally misconceived because the amendment has, in fact, brought stability. FM has stated that several companies who have paid earlier have already asked for refund after Vodafone judgement and more may follow. This, in fact, would lead to much greater instability than the stable situation that the amendment will bring for all time to come.
Confidence
It is wrong to say that confidence of the investors will be damaged by the amendment. In fact, a stable situation should boost their confidence. The investors (FII) will come to India so long the surging purchasing power of a huge middle class gives them profit .
