Condemnable with retrospective effect

Pranab Mukherjee’s budget, singularly short on new ideas to generate additional resources, proposes to let the taxman dig up cases as old as 16 years where individuals acquired foreign assets to ensure they were indeed assessed.

Published: Mon 26 Mar 2012, 10:00 PM

Last updated: Thu 2 Apr 2015, 9:45 PM

The immediate target is the $11.076-billion Vodafone-Hutch transaction of February 2007. But the finance ministry officials say the move will allow them to zero in on 35-40 other similar deals to raise a total of $10 billion or Rs500 billion, roughly equal to the bill for the job guarantee scheme for one year. What that will do to business confidence or investment sentiment is another matter.

In a landmark judgment two months back, the Supreme Court held that Vodafone was not liable to be taxed on the deal, since the country’s laws did not provide for taxing mergers and acquisitions done offshore, even if those business deals were implemented in India. The government filed a review petition, which was dismissed this week by the court which ‘found no merit in it’.

Even before the Supreme Court had decided on the review petition, Mukherjee thumbed his nose at the court and proposed amendments to the Income Tax Act (and that too retrospectively from April 1962) to bring the Vodafone-Hutch type deals into the tax net. The Explanatory Memorandum on direct taxes that talks of the amendment going all the way back to 1962, also has a ‘validation clause’ which confers justification on actions of the tax officials “notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any Authority”.

Mukherjee has claimed that the proposed amendments were meant only to “make the intention of the legislature clear”. He has pointed out that government is empowered to legislate and there is a history of such retrospective changes.

These are specious arguments that will not stand scrutiny. The number and nature of the amendment make it clear that their objective is not just to make clear the intention of the legislature but to legislate the new thinking on the issue.

The issues involved go beyond a tax dispute between the government and a telecom firm. Many companies in several sectors, IT for example, will bear the brunt of the budget proposal to amend tax laws with retrospective effect. The budget proposal to retrospectively amend the definition of ‘royalty’ from 1976 will force many Indian companies to pay tax on past purchases of computer software.

Indian corporate houses as well as foreign investors are keenly watching the government’s moves. Going by what the law says is one thing, trying to figure out what was in the minds of lawmakers makes investing a whole lot more risky.

Once the budget for 2012-13 — in which the proposed amendments have been suggested — is adopted by parliament sometime in May, the tax officers can (and probably will) have another go at Vodafone. This can trigger another round of litigation. That will hardly be an advertisement for India as an investment destination.