Vodafone Retro Law Change Is A Failure Of National Governance
Shri. Dinesh Vyas, Senior Advocate
Eminent Senior Advocate Shri. Dinesh Vyas expresses anguish at the covert manner in which the retrospective amendments to nullify the judgement of the Supreme Court in Vodafone International vs. UOI were introduced in the Finance Bill 2012 without any reference being made to it in the Finance Minister’s Budget speech. Given the size & significance of the issue, the lapse of the Finance Minister is deliberate and a failure of national governance standards, he says, and adds that the Government’s clumsy attempt to change the law has caused, amongst big-ticket foreign investors, a loss of faith & confidence in India as a reliable investment destination
The truth of the matter is this. Sachin Tendulkar’s hundredth century was the turning point in the journey of Union Budget 2012-13 and after this the interest of an average Indian in the whole Budgetary process receded and went down and down. But by the time the hundredth run was scored, the average Indian had reached to the following conclusions with regard to the Budget.
The Finance Minister was playing a game of political survival in New Delhi while the game of ODI was being played in Mirpur, Bangladesh. The attempt was to have a smooth sailing without disturbing further the political balance. There was no major reform programme to be presented before the Parliament. There was no desire to please the corporate world. The common man was to be pleased to keep the vote bank intact. In short, the government had no great agenda other than to continue to be in power.
a very fundamental issue of the national governance is thrown up. The amendment is likely to deal with Income-tax of about Rs.40,000/- Crores. If this was so, was it not absolutely imperative that this issue was included by the Finance Minister in his speech itself whereby he could inform the Parliament and the nation at large that this is what he has done?
The common man knew that the deficit financing which the Finance Minister was handling was a ball of fire. He himself had admitted in his Budget Speech that for the better part of the past two years we had to battle a near double digit inflation. Nothing major had happed to contain this inflationary trend. The additional burden placed in the realm of Excise Duty and Service Tax was in fact likely to have cascading effect.
The average Indian had therefore well understood that the raising of the income-tax exemption limit from Rs.1,80,000/- to Rs.2,00,000/- was meaningless and was only a necessary adjustment warranted to keep pace with the upward price movement. The net effect, however, with regard to the additional taxes was that as against the government’s direct tax loss of Rs.4,500/- Crores, there was a gain of Rs.45,940/- Crores on account of increase in indirect taxes resulting in a net additional burden of Rs.41,440/- Crores on the nation. The common man had therefore read through the situation, had come to the conclusion that there is very little to cheer him in this Budget and therefore the best way to get cheered was from Sachin’s hundredth century.
It was then that the professionals started digging the fine prints and detected one of the most important issues of the national governance in the Indian democratic framework. Very recently the Supreme Court has delivered a judgment in the case of Vodafone. It has held that the transaction of sale of shares of a foreign company (which held shares in an Indian company) by a non-resident to another non-resident for which the payment is made in foreign currency outside of India is not taxable in India and there was consequently no obligation of deduction of tax at source from the payment made by the non-resident.
what is without any doubt clear is that propriety demanded that this Vodafone judgment was specifically referred to in the Budget Speech and in the Memorandum. Moreover, the damage that has been caused to the confidence of the foreign investor in India is irreparable and brings to disrepute India in the comity of nations
In order to supersede this Vodafone judgment of the Supreme Court, the Finance Minister has proposed in the Finance Bill certain changes which are of far reaching implications. The Finance Minister has proposed to bring to tax a transaction of the above nature with a corresponding obligation to deduct tax at source. He has also empowered the tax authorities to reopen cases such as above where the transaction has taken place within a period of last sixteen years. The Finance Minister has specifically and categorically included a Validation Clause as a result of which all the actions taken by the tax authorities in the Vodafone case are validated and they are empowered to make additional recovery and grant no refund in that case, setting at naught the entire Supreme Court judgment. The law is proposed to be amended with retrospective effect from 1st April 1962 that is almost fifty years in the past.
It is here that a very fundamental issue of the national governance is thrown up. The above amendment proposed by the Finance Minister in the Finance Bill which invalidates the effect of Vodafone judgment is likely to deal with Income-tax of about Rs.40,000/- Crores, according to the officials of the Finance Ministry. If this was so, was it not absolutely imperative that this issue was included by the Finance Minister in his speech itself whereby he could inform the Parliament and the nation at large that this is what he has done. But truth of the matter is that there was no reference to this issue in the Budget Speech. Alternatively, if the issue was not included in the Budget Speech itself, was it not absolutely essential that Vodafone case referred to expressly in the Memorandum explaining the provisions relating to direct taxes presented before the Parliament along with the Finance Bill, 2012. Again, the truth of the matter is that this case was not referred to even in the Memorandum explaining the Finance Bill provisions.
It requires to be emphasised once again that this is an issue of national governance. Had the Finance Minister acted fairly and justly in dealing with the Parliament and the nation, Vodafone judgment ought to have been included in the Budget Speech and also in the Memorandum explaining the provisions of the Finance Bill. The Finance Minister could not keep away from the public eye, the amount of income-tax which he was recovering and taking home in government kitty. If, in a situation which can be compared with the above situation, a tax payer had not disclosed his income which he took home, a Court would have adjudicated upon his conduct by resorting to the provisions of section 271 (c) of the Income-tax Act. Under this provision, a Court can hold a person guilty if the tax payer has in his return of income “concealed his income or furnished inaccurate particulars of such income.” On such a tax payer, not only it was possible to levy a penalty but also commence prosecution proceedings resulting in imprisonment. Similarly, if such income which was taken had escaped assessment at the threshold, it would have enabled the tax authority to reassess such income even beyond four years on the ground that the tax payer had “failed to disclose fully and truly all material facts necessary for his assessment” under section 147 of the Income-tax Act.
Thus, it is clear that the fact that the above issue of superseding of Vodafone judgment was not mentioned in the Budget Speech and the Memorandum amounted to failure to disclose fully and truly all material facts and also was akin to concealment of income and furnishing of inaccurate particulars of income. An amount of about Rs.40,000 Crores was taken to the government kitty without specifically informing the Parliament and the nation. The moot question in this background is as to how can an average Indian be expected to honour and respect law. This issue is not simple but raises far too serious question of propriety, fair play, justice, ethics and values.
The importance of this development also lies in the fact that the issue such as this can create a major confrontation between the judiciary and the legislature-cum-executive. In a democratic federal structure, three constitutional organs viz. legislature, executive and judiciary have to play distinct specified roles. Each organ has to honour and respect the authority and dignity of the other organ. Law declared by the Supreme Court is the law of the land under Article 141 of the Constitution and once it is delivered it operates from the very inception leaving no “doubt” of any nature whatsoever and requiring no further “clarification” of any nature whatsoever. The Constitutional validity of this retrospective amendment affecting Vodafone is a controversy not free from doubt. But what is without any doubt clear is that propriety demanded that this Vodafone judgment was specifically referred to in the Budget Speech and in the Memorandum. Moreover, the damage that has been caused to the confidence of the foreign investor in India is irreparable and brings to disrepute India in the comity of nations. It is on these lines that the debate has to continue with regard to several other provisions in the Union Budget and Finance Bill.