Legal tangle

The rejection by the Supreme Court of the review petition filed by the government against its January order in the Rs 11,297 crore Vodafone tax claim case may not bring the curtain down on litigation in the case.

The government has sought to amend the Income Tax Act with retrospective effect, as part of the Union budget proposals, to override the verdict and make the company comply with its tax demand.

The court had dismissed the tax claim on Vodafone’s 2007 purchase of Hutchison Whampoa’s India operations on the ground that the acquisition was an offshore transaction involving only shares and the existing  law covered only direct transfer of capital assets within India. The  amendment is meant to make the legislative intent clear through a clarification. It would affect all indirect asset transfers in the last 50 years, though the government has stated that it would not go after all such cases. This might invite charges of selectively targeting some deals and may not be considered right and fair.

The more important issue is the wisdom in reopening issues settled by the highest court in the land through change in legislation with retrospective effect. The government and parliament have the power to plug loopholes in laws or to change them altogether if they do not serve the intended purpose. Laws can also be amended to apply to situations which were not envisaged when they were originally made. But it may not be proper to give retrospective effect to them to suit the government’s need and convenience.

Expectedness and reliability are important elements of the rule of law. Changing the law after a deal or action based on it was made goes against the stability of the rule of law.
The Supreme Court judgment had given confidence to the investing community and made it feel that policy changes would not adversely impact at a future date their investment decisions taken in accordance with an existing law. Continuity of government policy is vital for the success of business.

  The  government can change the law with prospective effect so that companies or individuals can act in accordance with its provisions. It may have a genuine grievance about non-payment of tax by Vodafone but it did not have a legally sound case, as interpreted by the highest court. The court also may not accept an amendment made with the aim of invalidating its judgment in the case and its review.