“To tax and to please, no more than to love and to be wise, is not given to men”. - by Edmund Burke
One can hardly imagine a situation wherein “X” an articulate business man goes to buy a shop for an amount “Y” and in return gets to a situation wherein after consulting his financial advisors and lawyers; he does not pay any tax as he is advised. “X” simultaneously gets to know the way things happen in the “jurisdiction” where his shop is located when he is asked to pay a hefty amount as tax. The person again takes financial and legaladvice goes to court and gets an order in his favour. Issue settled? Not exactly.
The government of the jurisdiction comes out with a retrospective amendment to change the meaning of the law itself and to undermine the decision of the court. Suddenly X finds himself in a precarious position as to whether the decision to invest in the jurisdiction was a sound one or not.
This may look as a distant and confusing story but it indeed is the greatest saga of the way tax is collected in India and how an investment by a Multinational Telecom Company (Vodafone) is plagued by the notices from the courts and Income Tax Department. It can be said that Vodafone has got its own version of the Zoozoo following it with the slogan “Wherever you go we follow”. Though the aggression of the tax authorities since last few years in mopping of tax revenues to close in the bulging hole in government’s coffers has also converted efficient tax paying multinationals like Nokia into a tax defaulter but the case of Vodafone is unparalleled.
Prologue to the story
It all started long time ago in 2007 When Vodafone popularly known as Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar. But instead of taking a straight forward route it decided on going around the tree. It’s subsidiaries exchanged cash for shares with a similar holding company for Hutchinson Essar, in far of Cayman Islands. (Yes while most of us might not know this but you can actually buy a Company having its operations in India without actually coming to India). It was clear that Vodafone believed that they were not liable to pay any tax in India because the deal was an offshore one clearly complying with the Indian laws as far as the matters of taxation were concerned. It was then that Vodafone actually discovered the Zoozoo in form of the Indian tax authorities.
The Legal Battle
A protracted legal battle followed, involving the Bombay High Court (which even gave a judgment in favour of the tax authorities) and then the Supreme Court. It was finally held by the Supreme Court in 2012 that the deal was within the four corners of law. The Court while interpreting section 9 of the Income Tax Act, 1961 (as it stood before the 2012 amendment) also asked the authorities to “look at” a transaction and not look “through it”. It was believed that the Zoozoo had been finally laid to rest.
It was then that the Government of the day came out with a retrospective amendment to the Income Tax Act, 1961 incorporating the concept of look through into Section 9 clearly negating the effect of the Supreme Court judgment for Vodafone. An international outcry followed criticizing the move with even the British Prime Minister raising the issue with his Indian counterpart. The incumbent Finance Minister (The Current President of India) took a hard stand when he aired his views on prime time television by stating that India was not a tax haven and the government was within its rights to realize revenue due to it.
As a result of bad international publicity, an expert committee under Dr.Parthasharthi Shome was constituted to review the tax laws which eventually came out with a clear cut report stating that the law related to tax has to be clear and devoid of any retrospective changes. It suggested the government to do away with retrospective changes in the law to make policy clear.The expert committee recommended that the amendment which is not merely clarificatory in nature should be made prospectively and where it is made with retrospective effect, the payer should not be proceeded against and the provisions be applied to the payee to whom the income actually belongs.
Even though there was a change of guard at the Ministry of Finance but Mr. Chidambaram also accepted the view taken by the tax authorities. The retrospective amendment was further followed by whole scale aggressiveness on part of revenue authorities to close the revenue deficit. As a result other Multinationals like Nokia also faced a lot of heat in form of Show Cause notices and resulting court cases. Nokia had to face a situation wherein their deal with Microsoft to sell of the mobile phone business went into jeopardy as a result of the department threatening to attach the factory in Tamil Nadu. Finally the day was saved by a stay from the Delhi High Court.
Meanwhile the Vodafone saga started getting more bitter with the government trying to settle the tax issue by having close room discussions. These were again followed by breakdown of talks and Vodafone threatening Arbitration under the Bilateral Investment Promotion and Protection Agreement (Also known as BIPA between India and the Netherlands)or conciliation under the United Nations Commission on International Trade Law (UNICITRAL) rules
The Indian Government has not yet relented in its stand but with a new government sworn in, the expectation to do away with retrospective amendments has gained momentum.
Legal Validity of retrospective tax amendments
The Supreme Court has held in the case of Ujagar Prints v. Union of India that a competent legislature can always validate a law which has been declared by courts to be invalid and such a validating law can always be made retrospective. It was also observed by the Supreme Court in MunicipalCommittee, Patiala v. Model Town Residents Assn. and Ors, that‘the basis of the law can always be altered retrospectively”. It can thus be concluded that the interpretation of constitutional laws with respect to the retrospective amendments clearly gives the authority to Parliament to change the laws retrospectively.
Having come to the said conclusion we can clearly move to the fact that even though the government of the day might have the adequate parliamentary strength for an amendment but would it be a viable decision economically?
The Final Decision
The Tax AdministrationReform Commission, headed by Parthasarathi Shome, has again stated in its recent report to the new Finance Minister Arun Jaitley that the retrospective amendments to tax laws should be avoided as a principle. The commission has also come up with an argument that Countries such as Brazil, Greece, Mexico, Mozambique, Paraguay, Peru, Venezuela, Romania, Russia, Slovenia and Sweden have prohibited retrospective taxation. It has been the case of countless other foreign institutional investors that for foreign direct investment to come into India at a high speed, India needs to make its law clear and prospective in its application.
The retrospective tax ball has now fallen into the court of the current Indian Finance minister with a looming budget in sight. It will be seen that whether the new government which has come to power on the promise of good days for development and economic growth takes a call in favour of sending the message straightaway or would it stick to the high handed way of its predecessor in realization of tax revenue at all costs.
The words of Edmund Burke would clearly be tested once the Indian Finance Minister gets up to present his budget in the Parliament.