The Supreme Courts rejection of the revision petition filed by the Government in the Vodafone case is most welcome. The court found ” no merit” in the review petition and, accordingly, dismissed it. Following the decision, the demand raised by th
e Income Tax Department for Rs. 11,297 crore on Vodafone stands cancelled.
The advance of Rs. 2,500 paid by the company as per the apex courts direction before it undertook to hear its appeal against the Bombay High Court order is to be returned with four percent annual interest. This should end the vexatious matter which has persisted ever since Vodafone bought 67 percent stake in Hutchison India for $ 11.5 billion in a transaction conducted in the tax haven of Cayman Islands. In its original order on January 20, the apex court had held that the Cayman Islands share transfer was outside the jurisdiction of the Indian IT Department. Frankly, the order was in keeping with the taxation system put in place by the Government itself in order to attract foreign investors. The fact that much of the postliberalization boom on the stock markets was driven by anonymous funds coming through the Participatory Notes route from mailbox corporate entities located in tax havens such as Mauritius fully underlined the desire of the Government to encourage such transactions.
From time to time, criticism regarding complete opacity of the PE investments had led successive finance ministers to try and bring some transparency in the flow of funds in the bourses but they had to succumb under the pressure of market men.
And their reason was honourable, that is, to ensure that the flow of FII funds does not dry up abruptly. However, the larger point from the Vodafone case is that stability and transparency in tax laws is a prerequisite for attracting foreign investment. If Hutchison Whampoa could control the Indian operations of a well- established telecom company through a Cayman Islands entity, it was reasonable to expect that whoever bought its share would continue to do so uninterrupted and unpunished by arbitrary income tax demands. When all is said and done, the Vodafone case is about the rule of law – and how we resist the temptation to tinker with it on individual whim and fancy.
Meanwhile, the proposed amendments in the income tax laws introduced by the Finance Minister in the Budget would tempt the same IT Department to renew the demand on Vodafone.
This will be a retrograde step and should be avoided.
Retrospective amendments leave a bad odour and are invariably motivated by extraneous considerations.
Indira Gandhi reversed the verdict of the Allahabad High Court voiding her election to the Lok Sabha through one such amendment in the electoral law. A number of others in the IT laws were clarificatory in nature. The ones proposed by Mukherjee in the Budget particularly smack of a vendetta, revealing the stubbornness of the IT authorities which would not take no for an answer since they believed they had the sovereign power to do as they pleased. This is no better than cutting off ones nose to spite ones face for even though it might make Vodafone pay the asked- for amount after the retrospective amendments, it will sharply reduce the flow of foreign funds into the country.
Who will trust a country which has a highly arbitrary system of taxation which can even undo the decision of the highest court in the land through retrospective amendments? It will be a mistake to think that what is at stake is the financial health of Vodafone. No. Regardless of how it grapples with the mulish IT authorities, it is the impact of the case on the investment climate in the country that should concern us. And, here we can say that the outcome in the Vodafone case would cast a huge spell on the business environment – whether good or bad would depend crucially on the foresight and commonsense of the Finance Minister. Now, Mukherjee deservedly enjoys a reputation for political and administrative astuteness. However, we do think that he has bee