Thursday, April 5, 2012

Vodafone case – is retrospective promulgation of a new amendment to a law fair?

I must submit upfront that I am neither an expert in taxation nor I am I fully acquainted with all the facts and figures of the case, but write this purely as an Indian layperson observer who has (extensively) been exposed to the news reports of the case and also as a concerned Professional Corporate Citizen worried about the precedent such a move will set, and the consequent adverse impact on investment into our country. I will also readily agree that the Government is empowered to collect tax on various commercial transactions and even for one minute, I have no intention to entertain the thought that somehow the government is not entitled to garnering revenue from any and every legally sanctioned means. However, all such modes of generating revenue have to fall under the ambit of due legal process, and some very basic aspects of the Rule of Law and Principles of Natural Justice have to be served, in my view.
Consider this.
When two individuals enter into a transaction that involves the transfer of ownership of a Capital Asset for a particular financial consideration, and it is established that the seller has earned a profit from this transfer or has ‘accrued Capital Gains’, then he or she should be liable for the payment of Capital Gains Tax. Perfectly legal and completely tenable, as this is clearly sanctioned by law. One assumes that it is natural for the asset that changes ownership to be located in India of course, for Indian Tax Laws to have jurisdiction. Now, in as far as I was able to ascertain, as per the existing laws, it is the seller that needs to file his returns after making a provision for the Capital Gains Tax, and the buyer has no role at all to play in this. Also, with basic research, it did not become clear as to whether it is the responsibility of the buyer of the asset to withhold the Capital Gains Tax, and hence I am inclined to accept that in any event, the seller has the sole responsibility to fulfill his obligations to society as a Corporate Citizen by honestly paying up his taxes.
Now, in this case, Vodafone was the buyer who paid enormous sums of money to acquire a so-called attractive asset that they had very high hopes about, in a country that they were sure was a democracy that had all the Pillars of Democracy well entrenched. Like any company, I’m sure they would have commissioned meticulous research to determine what the asset would cost ‘on road’ as it were, and thus, would have made pretty accurate provisions for a war-chest to fund the acquisition. Typically, they would have included all known and expected expenses including the Equity, Legal Consultancy, Speed Money (sadly a critical component when doing business in India), taxes, travel costs, etc. as per the then, known laws of the land. Now that the money has been spent, where is the justification in springing a proverbial bunny out of the hat and demanding an additional US $ 2.3 Billion?
If that were not enough, what about all the other costs?
  • We see a protracted battle in the Courts costing each party several hundred Crores in litigation expenses – will the Government make good these expenses to Vodafone?
  • We now find the government saying that it will amend the law and make that amendment applicable with retrospective effect, much like a sulking, petulant child that says that the last goal does not count because the goal post was not defined by the tree and the lamppost but something else altogether.
  • We note with concern the shock being expressed by other Governments the world over saying that they expected better from India.
  • We also see with profound sadness that all multinational companies doing a double-take on their investment plans in India due to a hostile policy and taxation climate, what with the FDI in Retail imbroglio, the cancellation of 122 Telecom Licenses and now this.  
While it is true that some of these are only notional costs, think of the cost of a negative impression the world business community will have about India. I wonder what the cost of that would work out to.
In my opinion, the whole unfortunate incident should never have taken place and surely, this is the result of some silly over-smart bureaucrat somewhere saying something like ‘oh no, we forgot to collect from the seller, so why can we not ask the buyer to pay?’ The more I look at it, the more it just looks like a foolish and an ill-considered move with its intention seemingly to have been one of just bringing into play, the Governments’ awesome nuisance value. Perhaps they expected Vodafone to buckle and settle out of Court, is the strong impression one carries. Now, instead of waking up and smelling the coffee, the Government is covering itself with more muck and ignominy by promising new laws with retrospective promulgation like as though it is a game of Cops and Robbers amongst 8-year olds. The person or the team that cooked up this tax claim on Vodafone needs to be hauled up to judicial scrutiny by the appointment on an inquiry committee and dealt with in the harshest manner possible to dissuade other Zorro’s in the department from attempting such stunts in the future. A public apology to Vodafone and the corporate world at large will not be entirely out of place, for sure.
Since it was the other party in question, Hutchison Whampoa that apparently evaded the payment of Capital Gains Tax, would it not have been more appropriate for the Tax authorities to make the demand on them instead of Vodafone? Just because Vodafone was an entity based in India now, and Hutch was not, was it justifiable to haul Vodafone over the coals? The correct approach would have been – to file a case in a competent Hong Kong Court by the Government, seeking recovery of their legitimate dues. Sure, this may have got thrown out at the first instance or may have taken forever to conclude, but at least the Government would have been hunting with the correct party of hounds, instead of simply shooting the closest fox.
Finally, touching on the aspect of the amendments to the law – the Government is again well within its right to amend any law as long as it follows due process, but again common sense dictates that all amendments would be applicable from the day they are passed by Parliament and is incorporated in the Gazette. Not one single day prior to that. Entities entering into any agreement that comes under the purview of the above amendment would then have the opportunity to make a provision for the same in their war-chest or in their list of responsibilities and hence enter into an agreement with all parameters known and defined. This is a basic given in a democracy where the Principles of Natural Justice and the Rule of Law are expected to apply. If this is not ensured by our Government, it will be no different from some despotic dictator of some tin-pot banana republic. I hope to god that we will not be disappointed.

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