Why the Vodafone Retrospective Law Will Ruin India: Harish Salve
Eminent Senior Advocate Harish Salve, the principal architect behind Vodafone’s spectacular success in the Supreme Court, has sent out a powerful emotive appeal that the retrospective amendments proposed in the Finance Bill 2012 to nullify the judgement of the Supreme Court and several other verdicts will malign India’s image in the minds of its citizens and foreign investors.
Harish Salve was addressing an august gathering of top business persons and high-level decision makers at a meeting organized by IMC a few days ago.
Harish Salve said that a country would prosper only when its economic and political institutions – the institutions that regulate and write economic policy – were transparent and stable and it did not matter what political system produced this. He cited the example of China which, though an autocracy, was able to attract large foreign investment because its political and economic institutions were stable.
.. deep anguish that the Government had sought to betray the solemn assurance given by Manmohan Singh, the Prime Minister of India to his then-counterpart Gordon Brown. When Gordon Brown had asked if the Government had proposed retrospective amendments, Manmohan Singh had solemnly stated that the question did not arise and that as the matter was in court, the Court’s verdict would be honoured. “Is the word of our Prime Minister worth less than 3 billion dollars? Is that what we have come to as a Nation?”
The problem with India, Salve said, was that while its image was already sullied by the political chaos and corruption at high levels like the CWG and the 2G scam and the resultant political paralysis which had crippled the Indian economy, its economic and political institutions were also unstable. He added that this instability in its political and economic institutions was the root cause why India was wrecked by poverty and disparity and enormous social tension.
The perception of corruption cannot be changed overnight, Salve said, because it requires serious structural changes. However, what can be changed is the perception that the Indian economic and political institutions are unstable. It takes little effort to make them look investor-friendly, growth-friendly and stable, Salve added.
The message that has to be sent to foreign investors is that though governments may come and go the policies of growth and the policies of economies will continue uninterrupted. This is the stability that foreign investors crave for, Salve said.
Salve rued that instead of giving the message that India was a picture of stability, the reverse had been done through the proposed retrospective amendments seeking to nullify the Vodafone and other verdicts.
Salve explained that the problem of Vodafone was that of foreign companies investing through downstream companies and seeking to avoid taxes in the country of investment. This problem was not unique to India, he said. All developed and developing countries faced the same problem but they sought to deal with the issue in a sensible and rational manner. Salve cited the example of France, Italy, Germany & Australia which had clear statutory provisions in place to provide that if the investment was done in a particular manner and if it crossed a particular threshold, the investee-country was entitled to tax the transaction; other wise it was not. All this was always prospective and applied to investments made after the coming into force of the legislation. The laws in those countries were clear on their scope and have remained static for years together.
Instead of dealing with the problem in a rational way and adopting the model already put in place by other Countries, India had proposed a “wholesale” retrospective change in the law, Salve said. He also pointed out that in its haste and obsession to nail Vodafone, the Government had not paused to consider that the proposed amendment that a shareholders’ agreement would be an “asset/ property” would be in conflict with the prevailing Company law and contract law, as interpreted in Rangaraj vs Gopalakrishnan AIR 1992 SC 453, that a shareholders’ agreement did not give enforceable rights against the company. “How do you explain to a foreign investor that a shareholders’ agreement, void in Company & Contract law, is nevertheless “property” and would give rise to taxable capital gains” asked Salve. “What sort of an idiotic message are you sending to foreign investors” he asked, underlining the need for the Government to have a long-term policy and to carefully think out its strategies before rushing to legislate.
Calling the amendments “for the removal of doubts” is adding “insult to injury. The interpretation of law is the function of the judiciary and when the highest court has spoken, there is no doubt left. The Government must have the courage of the conviction to say “you said my income-tax department was wrong. Hell with you. I am changing the law to say my department was right!”
Salve also expressed deep anguish that the Government had sought to betray the solemn assurance given by Manmohan Singh, the Prime Minister of India to his then-counterpart Gordon Brown. When Gordon Brown had asked if the Government had proposed retrospective amendments, Manmohan Singh had solemnly stated that the question did not arise and that as the matter was in court, the Court’s verdict would be honoured. “Is the word of our Prime Minister worth less than 3 billion dollars? Is that what we have come to as a Nation?” Salve demanded to know.
The proposed insertion of section 97 to provide that the income-tax department would be entitled to ignore the Tax Residency Certificate provided by a foreign investor came in for special criticism from Harish Salve. Salve pointed out that when he was the Solicitor General, he had been instructed by the Government to argue before the Supreme Court in UOI vs. Azadi Bachao Andolan 263 ITR 706 that Circular No. 789 dated 13.4.2000, which provided that the Tax Residency Certificate was conclusive, was valid and that the Mauritius treaty was deliberately designed to give Mauritius an advantage because of the large Indian diaspora there and the strategic position that Country had in the Pacific Rim. “Why do you sign treaties like this and then enact sections like s. 97” asked Salve adding that most Countries carefully draft their treaties so that a man reading the treaty knows what he can and what he cannot do. In India, everything was left to the tax department to decide despite whatever may be written in the text of the legislation. “Don’t take anything written in the law or the treaty seriously, your fate will be what the income-tax department wants it to be” is the message that we are sending to the World he said.
Salve also took strong objection to all the retrospective amendments being couched by the words “for the removal of doubts”. It is adding “insult to injury” he fumed. “The interpretation of law is the function of the judiciary and when the highest court has spoken, there is no doubt left” he said and thundered that the Government must have the courage of the conviction to say “you said my income-tax department was wrong. Hell with you. I am changing the law to say my department was right!”
Salve was particularly disturbed by the proposed change to the Customs law which sought to make an offence under the Customs Act on par with an offence under the Narcotics Act and the dreaded Prevention of Terrorism Act. If there is a duty dispute of more than 30 lakhs, which included a valuation dispute, the offence was not only cognizable and non-bailable but there was a presumption that the person was guilty. The section reads on par with grant of bail in the case of an offence of murder under section 302 of the IPC, he said.
Salve was also irked by the proposed GAAR and its vague provisions. “With the remarkable reputation that our tax department has, what is the message you are sending” Salve asked rhetorically.
Harish Salve also subtly indicated disappointment with the “deafening silence” amongst the intelligentsia in respect of the proposed amendments. “When men have voices, brutal laws are impossible” Salve said, quoting from Mark Twain and implying that the Indian public had to find its voice and protest against the amendments instead of maintaining a studied silence in the matter. “Why have we lost our voice against this brutality though there had been a global outcry?” Salve asked. “We are no longer in a license raj and you are not dependent on the Government for your business” Salve reminded the august gathering of top-notch businessmen. “You are not beholden to those who sit in North Block and so you must stand up and say that you will not stand for this nonsense” he said. It was a “frontal assault on foreign investment and on Indian law”, he said.
Salve sent out a clarion call that the “time had come” when the Government had to realize that the citizens would no longer these things in their stride. All right thinking Indians had to “stand up and be counted” so that the “voices of sanity would prevail” he said. If this was not done, the price for this would be paid by India as a whole and by the business community in particular, Salve cautioned.