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Why We Couldn’t Have Let Vodafone Get Away Without Paying Taxes: FM

Shri. Pranab Mukherjee

Why We Couldn’t Have Let Vodafone Get Away Without Paying Taxes: FM

Editorial Staff

Finance Minister Pranab Mukherjee delivered a fiery speech in Parliament yesterday in which he explained the rationale behind the Government’s resolve to tax Vodafone despite the Supreme Court’s verdict. He made out a strong case on why the Supreme Court’s verdict was against the rule of law & argued that if the UK could enact a 21 year retrospective law, India was not an “inferior” Country to be not entitled to do the same

Excerpts from the speech delivered by Shri. Pranab Mukherjee, Finance Minister, on 8.5.2012 in the Lok Sabha, during the debate on the Finance Bill 2012

On the Report of Standing Committee on Direct Tax Code Bill 2010

I thank, once again, Chairman and members of the Standing Committee on Finance for the excellent Report they have given on DTC. But I admit my own shortcomings that I could not fully implement it because I could not fully study it. I knew the proposals but to know the basic proposals and to study, understand and appreciate are different. Perhaps my intelligence level is low, that is why, I require some time to study and thereafter to firm up my view. Somebody’s IQ is may be much higher than me but my IQ is little less perhaps and that is why I wanted to read it thoroughly. It is an excellent Report. I have gone through some pages. It is an excellent Report and I am giving you an assurance that if you cooperate, we will get it done; get it passed in the Monsoon Session; and thereafter we can implement it. I have provided some of these provisions. A few of these provisions are already in the Finance Bill of this year.

One hon. Member mentioned about a British amendment exactly of similar nature. In the year 2008, they made an amendment in the Finance Bill, of Section 58 which gave effect to it from 1987. It means that they are having a retrospective legislation in respect of taxation law which becomes effective from 21 years back. If they are entitled, surely India is equally entitled. India is not an inferior country compared to any other country. Therefore, we have that right

On GAAR

GAAR had agreed to defer one year not because of any fear or apprehension. I may be a very small man, very little man but one thing I can assure and I can tell the distinguished Members of Parliament that I am not afraid of any consequences. When I borrowed money, I was much younger … On the very floor of this House, many people told that you will ruin the Indian economy … But I came out with my head on my shoulder; I came out, not on stretcher but on my foot, out of the IMF building declaring that India will not withdraw the last tranche of IMF borrowing of 1.9 billion USD. I do not know whether it has happened in any other country. We did it. It is not an individual credit. It has nothing to do with the individuality or personality of Pranab Mukherjee. It is the strength of the Indian economy; it is the resilience of the Indian economy. The contribution is by Indian farmers, Indian workers, Indian managers, Indian experts, Indian technicians.

On Vodafone, retrospective legislation, Parliament’s powers & black money

The last point, which was referred to by Shri Advani ji, is about the operation against black money. My whole argument on the Vodafone was on that point. It is because my point is very simple. I would like to be guided either by the Double Taxation Avoidance Agreement or tax. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin by making some arrangements to certain tax haven areas, to certain tax haven locations through a complicated setting up of a series of subsidiaries, and having huge capital gains on the assets located in India.

I have explained that retrospective effect, to clarify the legislative intention, must be with reference to the date of enactment. How can the intentions of the legislature have any other reference point than the date of enactment, whether it is 1961 or 1951 or 1948? If clarificatory retrospective arrangement is to be made, it will be with reference to the date of enactment. But, the effect of the retrospective amendment in respect of the taxation will be covered by other laws. Here, the Income Tax Act Section 161 says that no tax can be levied beyond six years.

Therefore, the mention of 1961 is academic, but the tax liability will arise retrospectively, six years before, from the current date of assessment.

Either you pay tax here or you pay tax in your own country with which we have a Double Taxation Avoidance Agreement. It is as simple as that. The rule of law is there. Our Supreme Court has given a verdict. Somebody has said how we could go against the judgement of the Supreme Court. Many eminent lawyers are here. They are Ministers. I am not like them, but most respectfully I would say that I am fully aware of my right as a legislator. Law-making power only vests with the Parliament. The Supreme Court may interpret law, but equally the Parliament has the right, Legislature has the right to express its intention by making amendment to correct the judgement of the Supreme Court”

Yesterday I clarified three issues. The assessment which has been closed, which has been made, there is no question of re-opening it. One hon. Member mentioned about a British amendment exactly of similar nature. In the year 2008, they made an amendment in the Finance Bill, of Section 58 which gave effect to it from 1987. It means that they are having a retrospective legislation in respect of taxation law which becomes effective from 21 years back. If they are entitled, surely India is equally entitled. India is not an inferior country compared to any other country. Therefore, we have that right.

We cannot declare India as a tax haven simply to attract the foreign investment. I want foreign investment for technology, for development, for resources.

Please remember that when the investment was also not there, we did not eat lizards. Till today, the investment requirement is substantially met by the rate of our domestic savings. Today it has come down to 33 per cent or 34 per cent, but it had reached as high as 35 per cent or 36 per cent of GDP. The rate of investment was 37 per cent or 38 per cent. Therefore, we are not in that distressed a situation that a country of 121 crore people will be treated as tax haven like Cayman Island, The Isle of Man or Virgin Islands. We cannot be equated with them.

Either you pay tax here or you pay tax in your own country with which we have a Double Taxation Avoidance Agreement. It is as simple as that. The rule of law is there. Our Supreme Court has given a verdict. Somebody has said how we could go against the judgement of the Supreme Court. Many eminent lawyers are here. They are Ministers. I am not like them, but most respectfully I would say that I am fully aware of my right as a legislator. Law-making power only vests with the Parliament. The Supreme Court may interpret law, but equally the Parliament has the right, Legislature has the right to express its intention by making amendment to correct the judgement of the Supreme Court. The very first amendment to Constitution of India, which is not an ordinary law, for insertion of Article 35A and introducing certain other relevant changes, was done in 1951. It arose out of the judgement of the then Supreme Court. Parliament considered that the Supreme Court did not reflect the intention of the law-makers. So, the Constitution, the basic document, was changed. When did we not fight with the Supreme Court? Did we not fight against it in Golaknath case and Keshvanand Bharati case?

Not only in India but everywhere, in all developed societies, Legislature’s intention is what matters because we are representing more than 70-crore people of this country. Each constituency has 1.5 million or 1.6 million voters. Therefore, their intention is what matters. Yes, as far as the Supreme Court and the Judiciary is concerned, the Constitution has given them the power to interpret the law. However, the law is to be framed by us. If we find that there is a conflict between the ‘intent’ of the Legislature and the ‘interpretation’ of the Constitution, most respectfully I submit that by interpretation of the law, our right of amending it or asserting our right is not taken away. That is the power of the Constitution which is vested in us.

White Paper on black money

How did the Prime Minister make the statement in his letter to the UK PM that “There is no retrospective application of taxation”? Was this draft prepared in the Finance Ministry? If the draft has been prepared in the Finance Ministry, I am quite sure they would not have made a crucial mistake of this kind. This Parliament is competent to pass legislation which will have retrospective effect and no court and nobody can take away this authority of the Indian Parliament

Advani Ji has raised the issues of black money and White Paper. I am bringing the White Paper before the Parliament Session adjourns – not on 22nd, but I will try to bring it much earlier. The drafting is in the final stages. I will try to give all the relevant and possible information. He has raised two specific points, one of which is about the names which we have received. There is one problem. I have shared it with the others. They have stated that I could disclose the names when we prosecute the people. As Shri Yashwant Sinha Ji was correctly pointing out, those names against whom prosecution has been launched by the Income Tax can be divulged. There is no problem in it. However, what we get is raw information. In that raw information, only the names are there. Therefore, the Department has to scrutinize to see whether they have the legal permission, whether they have the authorization from the Reserve Bank and whether they have any other business where they are entitled to have it. We have to first establish that the amount which they are depositing is illegal. For asserting the legality or the illegality, it will have to be scrutinized. After that, where it is found that there is no legal sanction, the prosecution will have to start. When the prosecution starts, then the names can be disclosed. So, when the prosecution will start, we will give you whatever names we have got.

I do not know why it happens at the time of talking about money or finance, but my voice starts cracking at the time of replying to the discussion on the Budget or the Finance Bill!

In respect of estimates of black money, three institutions are studying it independently and they will give their reports at the end of an 18-month period, and that period is coming to a close around July or August. We have not yet received their reports. I will share that information with you, as soon as I get the reports from those three independent Study Groups. But the White Paper containing other relevant information will be made available to the hon. Members and I will lay it on the Table of the House.

Yashwant’s Sinha’s (former Finance Minister) speech excerpts

There has been great controversy over the retrospective legislation and it has been debate vigorously in the press. I have with me the letter dated 5.2.2010 written by the Prime Minister which the Finance Minister must be aware of. It is addressed to the then UK Prime Minister Gordon Brown. It concerns the tax liability of Vodafone and I want to bring it on record. I am quoting:

I can assure you that Vodafone will have the full protection of the law and access to the legal system in India.”

We know they had the full protection of the law. They went to the Supreme Court. The judgement came in their favour. We know that you went in for a review petition. The review petition was rejected by the Supreme Court. So, they had the full protection of the law.

The Prime Minister further says:

I also understand – this is critical – that there is no retrospective application of taxation and a recent Court judgement has affirmed this position. There is no retrospective application of taxation.

This is what the Prime Minister of India is saying in his letter to the Prime Minister of the U.K. The Prime Minister was himself the Finance Minister for 5 years. I do not know how the Prime Minister has said: “There is no retrospective application of taxation.” How did he make this statement? Was this draft prepared in the Finance Ministry? If the draft has been prepared in the Finance Ministry, I am quite sure they would not have made a crucial mistake of this kind. This Parliament is competent to pass legislation which will have retrospective effect and no court and nobody can take away this authority of the Indian Parliament. But in the application of retrospectivity, we have to exercise great sense of responsibility. That is our look out and I am not commenting on individual case. You deal with that case in the most judicious and equitable manner. But the point I am making is whether it is transfer pricing, whether it is capital gains, whether it is anything else, the Parliament has a right to legislate, and, as I said that right cannot be taken away by anybody.

9 comments on “Why We Couldn’t Have Let Vodafone Get Away Without Paying Taxes: FM
  1. P C Sinha says:

    It is indeed surprising that so many negative feedbacks are coming on amendments. If you read the SC’s order it is clear that they wanted this problem to be addressed by Legislature. In fact they have said that even if the FDI is coming from Mauritius route, the AO can examine the matter. It is not that an assessment order was passed. Vodafone was merely asked to deduct tax at source on payment being made to Hutch. Instead of deducting tax at source, they filed a writ petition. I am sure they must have retained the money in their global accounts as a contingent liability.

  2. Rakesh Agarwal says:

    The main defense taken by the FM in justification of his proposal for retrospective amendment is the retro amendment passed by British Parliament. Are we supposed or obliged to follow the steps of Britain. It appears some people in the country still feel Britain to be their MASTERS.
    One single Government / Parliament should not be allowed to radically change any law particularly as important as of Income Tax Act, Constitution, Transfer of Property Act etc. And changing the basic fabric of law by One Government in power that too by simple majority is very dangerous for the county. This leads to a situation where people remain at the mercy of liking / disliking / whims / fancies of One Particular set of ‘Rulers’. We have recently seen what happened in the case of FBT – first introduced then taken away. At least as a first step the present Simple Majority Rule should be changed to ¾ Majority Rule.

  3. P.G. Katharotiya says:

    We have learned parliamentarians like Shri Pranav Mukherji and Yashwant Singha and many others for whom the people of this country have proud that they are at the helm of affairs. Corporates (generally and not to a specific corporate) and also some other tax payers many a times escape from tax net by finding out the loopholes in the law (as they have advisers of fertile brains) which at the time of framing laws the law makers would never have imagined of such misuse. The parliament is therefore having supreme power to rectify the situation. The intentions should be clear and justifiable. However, this power should not be misused and should be exercised impartially. There are may instances in the Indian history to amend laws retrospectively. Only the question is that the parliament should have done this exercise at a little earlier stage before the verdict (the case was going on and government was supposed to be aware of it). In such circumstances, such hue and cry would have not been there. It would also have saved time, money and energy of the Supreme Court and the 2 sides and the government would have not to face the criticism of amending law retrospectively.

  4. jitesh sonee says:

    Actually the scenario is moving towards pre 1991. The whole exercise is to collect revenue and distribute in view of various populist schemes being practised and which are on anvil.Pranab loosing temper in parliament as well as before media is becoz of pressure of revenue requirements to sustain the political schemes which are mostly not creating assets either tangible or intangible.

  5. CA DEEPAK AGARWAL says:

    THERE IS NO DOUBT PARLIMENT IS SUPREME AND HAS THE AUTHORITY TO FRAME LAWS .
    BUT ABOUT THE COMMON MAN . IF DOES SOMETHING WITHIN THE FRAMEWORK OF
    EXISTING LAWS , SHOULDN’ HIS RIGHT BE PROTECTED . HOW WILL THE CORPORATES
    PLAN AND EXECUTE THEIR PROJECTS . WHY HE SUFFER BECAUSE INTENT OF THE
    LEGISLATURE WAS NO CLEAR . ARE WE SUPPOSE READ THEIR MINDS .

  6. Hari says:

    Hi,

    If the intent of the law is what matters, what prevented the hon. FM from amending the law before the supreme court verdict ?

    What prevented the hon. FM from amending the provisions of the law say 3 or 4 years back ?
    Why are the rules of the game being changed after the tax dept. has lost the game fair and square ?

    how far the intention of the law is being taken seriously in respect of other legislations like the one against corruption ?

  7. Sarosh Irani says:

    Pranab da I wish you could become the PM and give the post the guts in life it deserves… The Punjab ka sher has become a chua, a complete mouse…

  8. girishdave says:

    What more could you expect from a P.M. who is surrounded by the likes of Montek, Chidambaram and Kapil Sibbal, who can sell us. Whatever respect we had in P.M, it is lost.

  9. Siddharth says:

    Hi,

    It was a good article, keep posting such stuff.

    regards,
    Siddharth

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