FactBehindFiction: Finding a face-saver

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Retrospective amendment in Vodafone case was a blunder, which is why a compromise is needed

The BJP manifesto accuses the UPA government of “tax terrorism and uncertainty” creating anxiety among the business community and vitiating the investment cli­mate. Hence, it has pro­mised to provide a non-adversarial and conducive environment, if voted to power. The manifesto goes on to allege that unleashing of tax terrorism has dented the country’s image.

Though it has not spelt out what it means by tax terrorism and uncertainty , it is quite clear that it is referring to the retrospective amendment (retro tax) after the government lost the Vodafone tax demand case in the Supreme Court.

The case concerns a tax dispute between the Vodafone group and the income-tax authorities over the company’s $11.2 billion acquisition of 67 per cent stake in Hutchinson-Essar from Hong Kong-based Hutchinson Whampoa in 2007. Because the sale transaction was conducted overseas, no taxes were paid in India.

Yet, Indian tax authorities demanded capital gains tax from Vodafone under Section (1) (i) of the I-T act amounting to $2.5 billion (almost Rs 11,000 crore). Vodafone argued that neither it nor Hutchinson were liable to pay the tax as both were located outside India.

The dispute was taken to the Supreme Court where the government lost the case. The then finance minister Pranab Mukherjee amended section 9 (1) (i) of I-T Act retrospectively, suggesting that the changes were clarificatory in nature.

However, experts argue that the amendment was bad in nature and intent as retrospective changes in the law could only be justified when a constituent decision was wrongly interpreting law and there was need to clarify and remove ambiguity.

Section 9(1) (i) was incorporated in 1971 when the law could not have provided for such transactions as nobody would have contemplated that a foreign company would invest in India in the manner Vodafone did. Nobody is opposed to changing the law, but it has always to be done prospectively, they suggested.

By way of example, it is said, individual taxpayers are provided deductions up to Rs 1,00,000 for investments in certain instruments to incentivise savings. But if the government were to withdraw the concession retrospectively, say from 2005 onwards, both taxpayers and authorities would be confronted with unimaginable chaos.

Hence, any amendment to tax laws should always be prospective in nature, barring exceptions to remove ambiguity. The Vodafone case had no scope for ambiguity.

OP Bhardwaj, a former revenue official and founding partner of law firm Associated Law Advisers, expressed surprise at the way a seasoned politician like Pranab Mukherjee was misled in his assessment, and said the government must have been too embarrassed to subsequently reverse his decision.

This one mistake, Bhardwaj says, cost the government dearly and tarnished India’s image as an investor-friendly destination.

While it might be true that the government had foregone substantial tax revenue in the Vodafone deal, it is important to consider every transaction on the basis of cost-benefit analysis, and not merely from the revenue point of view. The Vodafone deal should be valued for facilitating higher mobility and deeper telecom penetration. Also the deal has been a trendsetter for several multinational companies bringing in foreign investment and technology to the country. Unfortunately, revenue officials are beset by the colonial mindset, where emphasis is placed on adopting an adversarial approach. This also explains why there are so many litigations.

Revenue officials often avoid taking decisions and take to litigation in settling disputes that fall in the grey area, so that they are not blamed for revenue loss to the exchequer. Lack of accountability results in revenue officials going unpunished or not being penalised when judgments favour taxpayers.

As of date, more than Rs 2,00,000 crore is locked up in litigations with a sizeable amount unrecoverable because of bad orders.

In private, certain tax officials also agree that the retrospective amendment was a blunder. The issue now is to work out a face saving compromise. The UPA government cannot reverse its own decision, that too taken by a senior and seasoned minister.

So, the matter can only be resolved if the BJP comes to power. The Congress manifesto is silent on retrotax, touching only on GST and DTC, which it has promised to implement within a year of being voted to power for a third time.

Already, there are a plethora of laws to deal with tax evasion, corruption and black money, which have not been effectively enforced because of administrative and supervisory ineptitude, particularly in the revenue department. A clear mandate in the ensuing elections should be critical for good governance and decisive actions.



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