Third time lucky at Vodafone? PDF Print E-mail
Wednesday, 21 March 2012 01:07
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With the taxman losing in SC again, his only hope is to wait till May to display the ‘intent of the legislature’

But, the argument on the Vodafone retrospective tax amendment now takes a different turn, “this is a case of double non-taxation”—that is, Vodafone-Hutch never paid capital gains taxes in either the UK where Vodafone is headquartered or in India where the telecom network that Hutch sold is located. Why shouldn’t Vodafone-Hutch pay capital gains taxes when Sunil Jain does? That was not, could not, have been the “intention of the legislature”, to use the phrase from the note the finance minister put out last week.

Since many of the country’s pink papers seem to have bought this argument of the law on taxation being very clear—so Vodafone-Hutch ignored it at its peril, according to them—it’s important to put some perspective on it. It’s easy to dismiss it by arguing few, if any, OECD countries levy capital gains taxes when businesses are sold in the manner India does—so it can’t be double non-taxation!—but that doesn’t really go to the heart of the argument, which is that everyone is morally bound to pay taxes, and that is the duty of the finance minister to collect such taxes, even if that means going all the way back to 1962 to do so. This, in a nutshell, is the argument the finance minister made when he addressed industry over the weekend and, going by my conversation with some top corporate economists, the argument seems to have gone down well.


It is a good idea to go back to the same set of Budget papers that contains the famous Vodafone amendment. Clause F in the Explanatory Memorandum on direct taxes that talks of the amendment going all the way back to 1962, my colleague Subhomoy Bhattacharjee discovered (http://t.co/L3nhBM9e), also has a ‘validation clause’ which says it “shall operate notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any Authority”. Which means that, now that the Supreme Court has dismissed the government’s review petition, the taxman will have to wait till May, when the finance bill has been passed, to have another go at Vodafone! On page 66 of the Receipts Budget, Tables 12 and 13 give you the details of the revenue forgone by the tax authorities. R51,292 crore is the revenue the taxman never collected in 2011-12 from corporates, R42,320 crore is the tax not collected from individuals, R2,12,167 crore is the value of the excise duties forgone, R2,23,653 crore is the amount of customs duty that have been forgone in 2011-12—all told, that’s 49.13% of the total tax collections in the year. This is not a small sum and, year after year, Sitaram Yechury cries himself hoarse arguing that if the government collected the money from filthy rich corporates it could reduce the tax burden on you and I. Yet the government does precious little about it. Why?

Of the corporate tax giveaways, R36,468 crore was for ‘accelerated depreciation’ that companies were allowed to charge to incentivise production, R5,139 crore was the tax forgone on account of the scientific research firms were doing, R8,153 crore was given away so that firms could set up SEZs that would boost both employment and India’s exports, R3,257 crore for setting up industry in the Northeast, Uttarakhand and Himachal Pradesh … In the case of excise giveaways, R12,880 crore are the giveways for setting up industry in the hills. In many other cases, the idea of excise exemptions is to lower the prices of items used by the common man. When the government lowered excise duties from 14% to 8% in 2008-09, the argument given was that a stimulus was needed to protect India from the Lehman effect.

The idea is not to get into whether the tax giveaways are right or wrong—I’m completely opposed to the SEZ tax exemptions since I think the investments will come in anyway, but that’s not the point. The point is that the government does not tax everyone in the same manner, and the tax treatment is certainly not uniform over a period of time. Though the statute on SEZs specifically says they are not to be taxed, the fact is that, last year, the finance minister brought in a minimum tax on SEZs—is this to be dismissed on grounds that it violates the “intention of the legislature”?! Similarly, while you and I pay capital gains taxes if we sell our house, those investing in the stock market get away with paying just 0.125% as securities and transaction taxes if they’ve held the shares for more than a year—even this is to be lowered, to 0.1%! FIIs coming in from Mauritius are allowed to get away with no taxes while FDI is asked to pay taxes even though the latter is supposed to be creating jobs and productive capacity while the former isn’t.

If the government does not tax everyone in the same manner, and across time for that matter, the only thing that matters is what the government’s tax law is at any particular point in time; there’s no point bringing in morality or fair play or level playing field. And that tax law, the Chief Justice of India has just told us, not once but twice including yesterday, does not allow the taxman to tax a Vodafone-type transaction of a company that’s registered overseas selling its shares to another company overseas. Perhaps that’s why the canny finance minister has brought in the ‘validation clause’ which says it “shall operate notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any Authority”. Now that’s “intention of the legislature”. Till the month of May then, when the finance bill is passed!



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