India’s Constitution empowers Parliament to make extra-territorial law (Article 245). Hence, in the Finance Bill placed before Parliament last week, provisions have been incorporated in several sections of the income-tax law to change the law. The technique adopted is to insert several
explanations to the statutory provisions considered by the Supreme Court in the Vodafone judgement. These explanations are said to be clarificatory and for removal of doubts, and are operative from 1962.
Three points need to be answered: (i) whether our government is competent to undo the effect of the Vodafone decision by legislatively validating the Executive’s act; (ii) whether the government’s decision to do so is fair and reasonable; (iii) whether the proposed provisions would affect the inflow of FDI.
It is settled that the legislature cannot declare any decision of a court of law to be of no effect. It can however pass an amending act to remedy the defects pointed out by a court of law. As a legislature has the competence to pass a measure with retrospective effect, it can pass an amending act to have effect from a date which is past. There is nothing in our Constitution which creates any fetter on the legislature's jurisdiction to amend laws with retrospective effect and validate transactions effected in the past.
There can be good ground to believe that as the economic matrix was in India, and as the incidence of the ‘transfer’ has an obvious incidence and bearing on the Indian enterprise and its assets, the attempt in the Vodafone case to deflect the incidence of taxation away from India was neither fair nor reasonable. The Vodafone transaction causes wrongful loss to the country where the theatre of commercial operations exist, and cause wrongful gains to some non-resident players staging transactions in Cayman Islands, which you may not be able even to locate on a big map.
It is wrong to say that the Government’s action would adversely affect incoming FDI into India. The transaction in the Vodafone case was not designed to bring any FDI to India. No FDI came to India because of that deal. It was simply an unfair attempt to reap the whole benefit of capital gains through structuring transaction of transfer outside India for the gains of some non-residents.
I understand the Supreme Court has dismissed the government’s review petition against the Vodafone judgement. It is too early and unwise to comment on the shape of things to come.
(The writer is a Supreme Court lawyer and former chief commissioner of income tax)