Corruption: Three cheers for three verdicts

The Supreme Court has restored our hopes with three very effective blows against the government

At a time when ordinary Indians, struggling against mind-numbing corruption, were feeling rather despondent at the Anna Hazare movement having slowed down, the Supreme Court of India has delivered three hard-hitting judgements that hold out the hope of using the legal route to fight corruption.

On 31st January, the apex court held that filing of a complaint under thePrevention of Corruption Act is a constitutional right of every citizen. It also set a four-month timeframe for the ‘competent authority’ to sanction the prosecution of a public servant, failing which it would be deemed to have been granted. This order gives teeth to the guidelines laid down by the apex court in the Vineet Narain case relating to the Jain hawala scandal of 1996—another period of great hope.

The judgement was delivered in the context of Janata Party president, Dr Subramanian Swamy’s petition after he failed to obtain sanction from the prime minister’s office to prosecute former telecom minister A Raja. Clearly, what applies to the highest office of the land will apply to officials down the line too. While the discussion about this judgement has centred on whether or not the apex court had rapped the prime minister or the prime minister’s office (PMO), there are thousands of ordinary persons who had given up hope of ever being able to fight capricious action or brazen corruption on the part of government officials. This holds out hope for those who have been wrongly persecuted and harassed bygovernment agencies of being able to prosecute their tormentors under the Prevention of Corruption Act.

The judgement on 2nd February took the bold step of ordering the cancellation of 2G spectrum licences to 122 entities striking a blow for correcting a deeply rotten, corrupt and arbitrary system of policy-making, taxation and regulation.While it caused some turbulence in telecom stocks, a strong market rally suggested that, contrary to the claims of corporate lobbyists, the judgement has increased confidence about doing business with India.

The case filed by Dr Swamy and others puts a decisive end to the UPA (United Progressive Alliance) government’s attempt to discredit and destroy the findings of the CAG (Comptroller and Auditor General of India), and put paid to the telecom minister Kapil Sibal’s claim that there was no loss in the granting of 2G licences by former telecom minister A Raja. The apex court held that 2G licences were issued in a completely ‘arbitrary and unconstitutional’ manner and imposed a stiff fine on three companies. During the UPA’s first term in office, Mr Raja had given away 122 licences for a mere Rs9,000 crore, while the 3G auction had later fetched a massive Rs69,000 crore (which helped bridge the Budget deficit) despite giving away fewer licences.

If the Supreme Court struck at corruption and crony capitalism in the 2G case, it sent a different, but equally positive, signal in the Vodafone case. As lawyer Fereshte Sethna wrote in Moneylife, the judgement was a “resounding validation of the settled legal principle that tax planning per se is neither illegal nor impermissible.” And, in doing so, marked a closure to the five-year-old tax demand of Rs11,218 crore in the form of withholding taxes and interest, plus Rs7,900 crore (towards penalties) from Vodafone following an international transaction to acquire the Indian telecom assets of Hutchison for $11 billion. This judgement has ramifications for several companies who are fighting an assortment of tax demands in different courts across India.

In the Vodafone case, the Supreme Court correctly observed that “certainty and stability are the cornerstones of any fiscal system” and that “foreign direct investment flows towards locations with a strong governance infrastructure—good laws, efficacious enforcement of laws by the legal system.” It said the tax department couldn’t split a transaction into parts and interpret them separately so as to maximise the tax payable. In the same case, Justice Radhakrishnan’s separate but concurring judgement observed that the capital gains tax demand on Vodafone constitutes “imposing capital punishment for capital investments” and lacks authority of law.

These harsh observations ought to send a strong warning to India’s tax authorities, who devilishly revel in the obtuseness and lack of clarity of our rules and policies. It gives them enormous flexibility to interpret laws in a way that even honest taxpayers can be painted as criminals and evaders. Will the Vodafone judgement lead to a fundamental change the manner in which the tax department deals with taxpaying entities? Unfortunately, there seems to be no such hope. It is widely expected that the government would file a review petition as well as rewrite the Direct Taxes Code to plug the possibility of such cross-border transactions. But wouldn’t this apply only prospectively to international deals? Shockingly, legal experts are not so sanguine.

Arvind Datar, a senior advocate, recently wrote, “Revenue has a regrettable track record of repeatedly amending the law retrospectively to overturn every adverse ruling.” He says, in no other country are tax authorities “so unfair and petulant” and that the “department has never gracefully accepted any adverse verdict.” Actually, the department, in this case, is the Union government which encourages lack of clarity and legal amendments with retrospective effect. Will it happen in the Vodafone case too?

Mr Datar further said that the government faces the ‘irresistible temptation’ to nullify the judgement by amending the Income Tax Act and that it is capable of exactly such a ‘disastrous and counterproductive’ attempt. But one must remember that Mr Datar’s pessimistic view was expressed a little before the Supreme Court delivered its two stinging judgements in the 2G case to complete a triple whammy of rulings that have blasted the credibility of the UPA government.

A sensible government will read the mood of the people correctly and avoid any retrograde action; a smart government will realise that attempting to push dubious statutory amendments through Parliament at this juncture could lead to further ignominy. Unfortunately, it is hard to predict what this government will do.

In fact, with the Budget session round the corner, it may be time for the government to revisit its many promised reforms. In 2010, finance minister Pranab Mukherjee set up the now forgotten Financial Sector Legislative Reforms Commission (FSLRC). But, on 28th January, Mr Mukherjee said at a gathering in Chicago that “we are in the process of rewriting andcleaning up the financial sector laws and bringing them in line with the present day requirements.” He also said the FSLRC would produce its report by this year-end. A simple reading of the two separate statements leads to some confusion over whether the FSLRC is cleaning up financial sector laws (as per its mandate) or there is also a simultaneous effort by the finance ministry in this direction. Whatever it is, hopefully the government will be conscious of the need to repair the damage to its credibility following the Vodafone and 2G judgements. With two years more for the next general elections, the UPA government will need to work really hard at attacking corruption and upholding the rule of law, if it plans to remain in power.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at sucheta@moneylife.in