It is not surprising that last week, the lobbyists in the US got their treasury secretary Timothy Geithner to grill finance minister Pranab Mukherjee on his now infamous retrospective law in Budget 2012. From the day it was born - ostensibly to recover $2 billion in taxes from Vodafone, a suit that the company won in Supreme Court less than a month earlier - Mukherjee's law that's applicable from 50 years ago, with a six-year enforceability, has been the cause of the most intense debates within India and among global investors looking at the fiscal lawmaking of the world's second-fastest growing economy. This has been a tricky law to comprehend and analyse. From March 16, when it was tabled, till today, this law has been bothering me. And while there is no clear verdict, I have four windows from which to view this issue.
Does India have the right to impose a law retrospectively? The answer is an unequivocal "yes". Across the world, in the evolutionary history of lawmaking, retrospectivity - the process by which a law is made applicable on a date prior to its creation - has been a partner of lawmakers. The state is within its rights to make any law, prospectively or retrospectively. Dictatorships use it for changing all laws; democracies use it for civil and fiscal laws. When I met Mukherjee two days after he tabled Budget 2012, he defended the law, saying India has been making such laws for many years. In 1998, he said, there were nine such cases; in 2008, eight cases; in 2009, five cases; in 2010, four cases and in 2011, two cases. "Normally, retrospective lawmaking should not be done," he said. "But if we did not go for it, it would lead to a huge fiscal pressure. The revenue collected has been appropriated, how will we return that? I cannot create a fiscal crisis."
Is it right for India to enact a retrospective law if other countries do so? This is a tricky question, as it leaves the onus of individual decision to a wider community of sovereigns. It, therefore, allows other countries' lawmakers to influence ours. When I spoke to former finance minister Yashwant Sinha about Mukherjee's tax, I was surprised by his response. "He (Mukherjee) is right," Sinha told me. "This is a standard practice across the world. We have no objection to such an amendment." When I double-checked this, I found that UK enacted such a law in 2008, on a case similar to Vodafone's, popularly known as the Padmore case. A similar law in Germany was struck down by its Supreme Court in June 2011 on grounds of effectivity - not retrospectivity. Two cases in Australia (Poniatowska case in August 2011 and Payara case in November 2011) show retrospectivity is alive and well Down Under. And in the US, where investors are jumping with angst, retrospectivity is not unconstitutional.
When India needs foreign investment, does a retrospective law make any sense? This is the practical face of the same question. What it asks is that even if India has the right to enact such a law, given that it desperately needs global investors, is the timing right? That's an important question from the long-term point of view. But for a government that's oscillating from one short-term crisis to another, there is no space for strategic vision; tactical solutions will do just fine. Mukherjee believes that India's growth will attract investment, not its tax laws. He is in denial - global investors will shun India not because of its tax laws but because of inconsistencies, particularly if the judicial system is bypassed with a retrospective law that raises the possibility of changing a football field into a squash court and asking companies to play ball. Mukherjee cited the case of China, where despite retrospective lawmaking, investment has increased. Does he want India to move away from being a democracy? Is the increased sovereign risk worth the $2 billion? I don't think so.
Does a retrospective law make ethical sense? You don't need to be a law professor to answer that as an unequivocal "no". A retrospective law is against the principles of natural justice. So, if writing a column on retrospective law is made criminal from next week, I could be held guilty for writing it today. For companies that invest billions of dollars, such a law changes the rules of the game, turns all calculations awry. Fundamentally, we must know the law in order to align our lives around it. As an absolute, retrospectivity is unacceptable. But among governments, when it's a race to the bottom, a retrospective law gets the infusion of practical justification. Today, India is citing the UK, Germany and China; tomorrow, an emerging Africa will cite India. This race needs to end. May I suggest that on June 19, when the leaders sign the G20 declaration in Mexico, they add the following line: "We pledge not to enact a retrospective law in our countries."