Vodafone Retro Law Change Is A Failure Of National Governance: Dinesh Vyas

Shri. Dinesh Vyas

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.

15 comments on “Vodafone Retro Law Change Is A Failure Of National Governance: Dinesh Vyas
  1. nilesh chawda says:

    respected Sir :- the argument available on the part of the learned H.n. finance minister is ” INDIA SHOULD NOT BE VIEWED AS ‘BANANA REPUBLIC’ . RECENTLY I had the opportunity of reading an exemplary article on the same issue by Mr. Rashmin Sanghavi C.A. in INCOME TAX REVIEW , the journal of Chamber of tax consultants, mumbai; wherein the learned author has taken quite dissenting view but he has laid solid foundation in support. i request all to read the article.

  2. S K Choudhary says:

    Respected Sir,

    retrospective amendments so far used as tool to book errant compliers and or to plug loop holes designed by taking out flaws of the drafting while ignoring the true purport, object and spirit of the law in my view shall be permissible.

  3. s.srinivasan says:

    considering the way the govts come up with retrospective amendments , is it possible for the Govt to Amend the Act to make sure that there will be no retrospective amendment. may this is included in the DTC

  4. CA V.Mahaganapathi says:

    The view needs to be looked in only when the amendment pass-on some benefit to the general public. There (are)were many confusions pending before every tribunal and courts and such confusions were sorted out by bringing a proviso or amendment in the act retrospectively. While proposing to amend the IT act it was clarified that the tax to be paid in every case. Later Mr. Mukarjee clarified, it will be imposed only if the person not paid any tax in the foreign country and also in India. Even before the law gets amended a clarification has come. What will be the position if the govt says those NRIs who have not paid tax in the foreign countries should pay tax in India retrospectively?. The point one should keep in mind is the trust on government about its consistency in maintaining its commitment. Not every one is perfect and noting is permanent. Changes needed when new events are emerging. One should rectify the mistake when it found. However those changes should not change the past colour. Principle of natural justice should rule always. Justice is above all laws.

  5. deepak gude says:

    a different view point, retrospective amendment is a success, as law is man made and supreme court can over rule high court, if someone has taken advantage of a gap in law, by relying on form over substance, we have to praise the retropective amendment.

    lets not give foreign investors more importance as they have money, they have to fall in line and do whats mutually beneficial for the country in which they invest, they invest as they c benefit for themselves its not a donation, even donations are given when it suits the individual, public good is a by product

    think over

    similar is case with time limit for actions, they r admn conveniences but if a case is detected, offender cannot take shelter under time limit

    he has to be punished and message sent to all

    think over

  6. deepak gude says:

    the retrospective amendment is not a failure at all, its a message that if one tries to take advantage of form over substance, he will be caught and punished

  7. Ravi P says:

    The article reflects the popular mood of the stakeholders and in fact, attempts to create a “Deeming” breach of constitutional propriety. well, as per the constitution, all the three limbs i.e. legislature, executive and judiciary are having equal powers. legislature makes law and judiciary interprets the law. there is no constitutional conflict in any retrospective amendment to any civil law including income tax act, 1961. The only thing certain about the income tax act is that it changes every year through finance act, to accommodate the rapidly changing taxation scenario worldwide. But for these annual changes, out income tax act may soon find itself antiquated enough to serve any meaningful purpose. I would go to the extent of saying that it is this change that UNDERSCORES the vibrancy and inclusiveness of our democracy. coming to the present issue, retrospective amendments are not that uncommon in civil laws worldwide and in india, it is certainly not unprecedented. readers may find that in the last 4-5 years, there have been many changes in income tax act with retrospective amendment. the point is, it wud be unfair to look it, only through the prism of VODAFONE judgement. this brouhaha appears to be aimed at pitting the judiciary vs lawmakers. This amendment has to pass through the judicial scrutiny and shall meet its end. why create a confrontational scenario between judiciary and legislature, where none exist. By the authors logic, all judgements by the SC should translate into law. This judicial legislation is not what has been contemplated by our constitutional makers and in fact, is against the basic structure of the constitution.

  8. K.Raghu says:

    Congratulations for your candid view on this matter.It is indeed the greatest concelment of facts and clear intention to defraud the nation by introducing the proposed amendment in the finance bill . The extension of time sought before the H’ble Supreme Court to grant refund ordered by it by not disclosing the intention behind it shows the Govt
    as having failed to live up to the standard of true and fair disclosure expected from aum adhmi.

  9. Can a Law made with retrospective effect with arbitrarily selected past period pass legal scrutiny even if the President, without questioning, gives assent?

  10. Shipra Walia says:

    Beautifully said that the people holding the responsibilty of managing the law does not even know the rules of the law…

    This retrospective amendment is not just a vodafone. The government is using this tool from long including ishikawa. The amendment proposed does not just take care of vodafone but also of GVK industries where in the SC also held about the nexus to be there for extra territorial activities.

    The government clarifies the law made 50 years back now. Will they ever explain why they never did for so long. This is the 7th budget of Mr. Pranab Mukherjee. Was he waiting to tell the apex court..u r not the apex??

  11. CA V.Mahaganapathi says:

    Well said. In my view that the government is not worried about anything (governance, justice, etc) but for collecting amount from any one who has the same in what ever be the form. First they enact one law and give millions of provisions and amendments by which no one will understand the law. Second they will send notices with out any references penalising a well performing non government company. Third they will fight the case in court and if failed they will amend the law retrospectively. Even if they fail one fine mid-night they will nationalise the company and take everything. The poor guy who put his heart, soul, energy etc will get a compensation after TDS. After nationalising the company and after some years of mismanagement, the PSU’s share will be sold in the market for higher values (ONGC). If they could not do anything then they will direct another PSU to bail out the process(LIC). In all aspect it is only public money for the benefit of govt?. They wont allow Ramdev or Anna Hazare or RTI Activists to speak anything about the government. Finally they say the government is democratic. But it is only on paper but practically these actions are autocratic only.

  12. Dipak Thakker says:

    Heartfelt thanks to Mr. Dinesh Vyas for voicing the anguish of all right-thinking citizens of this country. He has been more than sincere in exposing the unspoken truth behind the proposed retroactive legislation. Tax reform should not be used by the government to bring the law into contempt nor to make a citizen’s precious right of appeal illusive. Today it is the taxpayers who need protection from the abuse of discretionary power and existence of arbitrariness. Thank you, once again, Sir.


    Retrospective amendments in law has become a routine affair for our government. The retrospective period coverage is also given without application of mind . It seems that if there was no Act of 1961, perhaps amendment would have been made w.r..e.f. 01.04.1921.
    The moot question is what is more important – Rs.44000 Crore or reliability of law and government and the goodwill of nation and people of nation.

    In the given situation one can say to a citizen of India, how can we rely on your words when the words written in your law are not sure and certain, and when your government cannot abide by law how we can believe that you are reliable?

    So the goodwill, reputation, reliability of all our people is also at stake.

    Many amendments are made with retrospective effect to rectify lapses of officers of government. For example provisions to allow delay in doing some thing before courts or in course of proceedings under law, to remove defect in forms, and other communications etc.

    Many amendments are just to overcome correct interpretation of law, made by courts because the interpretation is in favour of public.

    Retrospective amendments creates inequality amongst people. A person whose case is not before any authority or court is not affected, a person whose case is before them is affected. A case which has attained finality and all limitations for axtion have lapsed is not affected but a person in whose case limitation period exists, may be affected.
    Therefore retrospective amendments need to be considered as illegal, unconstitutional.

    Only in rarest of rare cases such amendments should be allowed, if at all.

  14. B Ramkumar says:

    Fully agreed. This budget is full of contradictions. If one of the intent of the Government is to prop up the growth rate,investors should be given a fair deal. How would the investors confidence go up if the Government propose to tax without any natural justice? There is no quarrel if these type of transactions should not be taxed or not – they should be taxed. It is the way in which these are proposed to be taxed. By this there will be no difference between Governments and highwaymen.

    It is amply clear that the proposals are from the officials and not from the political bosses or leaders. The former focusses only on tax collection whereas the latter will use tax as a tool for growth & development

  15. Deepak Nagori says:

    Fully agree with your views sir. I am confident that with the voices raised against this retrospective amendment by eminent personalities like yourself, the Finance Minister should drop this clause and make it prospective rather than retrospective. Such retrospective amendments which seek to disrepute the judgment of Supreme Court should not be allowed to see the light of the day. Also the “Validation” clause seeks to disregard any judgment of any Court or authority, which is a clear violation of Article 141 of the Constitution. Even this clause should be dropped from the Bill. Looks like we are moving away from a democracy to a dictatorship!

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