Pranab Mukherjee defends amending I-T Act retrospectively

Former President Pranab Mukherjee, whose decision as the Finance Minister to amend the Income-Tax (I-T) Act retrospectively in 2012, in the backdrop of the Vodafone case, had led to an uproar, has strongly defended the move, saying it was borne out his conviction that India's Direct Tax Policy should not discriminate between domestic and foreign entities.

In his book 'The Coalition Years 1996-2015', which was released on Friday, Mukherjee says he remained resolute on the decision, despite being advised to take the middle path. Retrospective tax has been one of the most contentious issues in corporate world in the last five years. It is related to a tax dispute between Vodaphone and tax department.

A huge controversy had broken out on the issue as soon as Mukherjee had announced in his Budget Speech of 2012-13 that he proposed to amend the I-T Act, 1961, with retrospective effect, to undo the Supreme Court (SC) judgment in the Vodafone tax case.

This was after the SC, in January, 2012, set aside a Bombay High Court judgment directing the Vodafone International Holding to pay Rs 11,000 crore as income tax on a deal made abroad. The SC order created an unusual situation, wherein the tax department was required to return several thousands of crores to several companies.

Making a strong defence of his decision, Mukherjee notes in his book that "despite the angst that my proposal generated at the time, and even now, both from within my party and outside, I wonder why every succeeding Finance Minister in the last five years has maintained the same stance".

Mukherjee further recalls that while the then Prime Minister Manmohan Singh was convinced that the proposed amendment in the I-T Act would impact the FDI inflow in the country, Sonia Gandhi, Kapil Sibal, and P Chidambaram also expressed the apprehension later that the retrospective amendments would create a negative sentiment for FDI.

Without naming anyone, Mukherjee says two more of his Cabinet colleagues advised him to take the middle path and to reconsider the decision, but he remained resolute.

"Days ahead of introducing the Finance Bill in the Parliament in 2012, several colleagues, including one along with a high-ranking Vodaphone official, approached me, seeking a reconsideration of the move to retrospectively amend laws," he recalls.

He further says that he was convinced that the certainty of payment of taxes needed to be embedded in India's tax policy and just because some foreign investors chose to structure their investments through tax havens, they should not be allowed to get away without paying taxes.

Mukherjee also argues that the budgetary proposal to amend the IT Act with retrospective effect from 1962 was an enabling provision to protect the fiscal interests of the country and avert a crisis. "This retrospective arrangement was not merely to check the erosion of revenues in present cases but also to prevent the outgo of revenue in old cases. As Finance Minister, I was convinced of my duty to protect the interests of the country from the revenue point of view," he says in the book.

He further mentions how he tried to explain to the then PM Singh that India was not a "no tax" or "low tax" country and that it could not be a case of someone paying no tax at all. He also writes that he explained to Congress leaders that FDI comes when there is profitability and not on account of zero tax.