Taking a cue from the Supreme Court’s lessons to the taxman on basic principles like jurisdiction, Finance Minister Pranab Mukherjee called Law Minister Salman Kursheed within minutes to take his own lessons on basic principles of law. If only the government ran refresher courses on such elementary issues, the economy  would have been rated a few notches higher by Moody’s for our predictability as an investment destination.

This comment on the apex court’s verdict today bears me out on my own humble submission made on this website regarding myopia afflicting our taxman. It is sad that one wing of the finance ministry (read FIPB) runs from pillar to post for FDI, but the CBDT guys often sitting in the same corridor (and controlled by Revenue Secretary, who is also a member of FIPB) do their level best to scare potential investors away by creating unpredictability for the existing ones! Let it be heard that litigation causes pain to everyone but the babu concerned!

In its landmark judgment on the appeal by Vodafone, the Supreme Court has ruled that the telecom is not liable to pay taxes and penalties for the acquiring 67 per cent holding in the mobile phone operator Hutchison Essar, in India in 2007 for Rs 55,000 crores or $11.5 billion. 

The taxman had been contending that the sale was subject to tax in India since the assets acquired by Vodafone are based in India. Vodafone had failed to deduct or withhold capital gains tax at the time of purchase of the shares. The taxman had raised a claim for capital gains tax on the profit earned on the sale.

'Capital gain’ means an increase in the value of a capital asset that gives it a higher worth than the purchase price. It may be short-term (one year or less) or long-term (more than one year). Section 45 of the Income Tax Act, 1961 defines it as any profit or gain arising from the transfer of a capital asset in the previous year shall be chargeable to income tax under the head ‘capital gain’. Further, Section 2(14) gives a very wide definition of ‘capital asset’, as property of any kind subject to exceptions. ‘Property’ itself has been understood as including intangible rights as well. Tax on the capital gains makes no difference between movable and immovable property with the result that transfer of either would attract capital gains tax.

Circular No. 621 – dated September 19, 1991 – issued by the income tax department provides that tax treaties generally contains a provision to the effect that the laws of the two contracting states will govern the taxation of income in the respective state except when express provision to the contrary is made in the treaty.

The Government of India had entered into numerous Double Taxation Avoidance Agreements (DTAA) entered into by the Government with various countries providing for:

* Reduced rates of tax on dividend, interest, royalties, technical service fees etc received by residents of one country from those in the other.
* Allowing credit for the tax paid by that person in another country in cases where such income is taxable in both countries, and vice versa.

The confusion created by short-sighted if not outrightly whimsical actions of the taxman had left foreign investors wondering if India is indeed confused. Is  the Finance Minister, who controls both FIPB and the CBDT, going for an over-kill to make short-term revenue gains? If that were so, how credible was Commerce Minister Anand Sharma in positioning India as an emerging economic power that respects global treaties and DTAA  with other countries.

Giving lessons to the taxman in its order, the Supreme Court has observed:

* FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works.
* Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system.
* Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner.
* Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views.
*Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.

Setting aside the impugned judgment of the Bombay High Court, the hon’ble SC has rightly directed the Taxmen to return the sum of  Rs 2,500 crores deposited by Vodafone  and pay an interest at the rate of 4% per annum alongwith the Bank Guarantee for a sum of Rupees 8,500 Crores given by Vodafone. (I wonder if some babus should be made accountable for the interest payout at the cost of you and me, the tax payer!)

The taxman’s demand notice to Vodafone had left a gaping holes in the scope and commitments under the DTAAs and implementation in letter and spirit. The FM and his team on the revenue side need to be seen in cohort with the national effort promote to promote Brand India. The CBDT should also have been rapped for cluttering the court’s attention from much more pressing matters rather than teaching elementary taxation principles to the taxman.

The logical step for the finance ministry is to now gracefully approve other long-pending executive approvals regarding Vodafone, so that the transfer of shares can be completed before the appointed date. The transfer has been unfairly linked to extant sectoral caps and the case settled today.

Can pettiness now stand in the way of letting Vodafone get back its core business? Delay will entail denial of justice and cement the impression that various line ministries in India can behave as the sovereign with no one bothered/accountable about the big picture.

Unfortunately, India isn’t the only place on earth which investors find attractive. Fortunately, India has the Supreme Court! But do we need every investor to get justice from there?