Budget 2012: Precedence led Pranab Mukherjee to tax foreign M&As

NEW DELHI: A controversial proposal to tax past cross-border deals in which the underlying asset is in India was accepted by Finance Minister Pranab Mukherjee after Attorney General Goolam Vahanvati ruled the changes would pass muster even as some policymakers opposed the idea of retrospective amendments, said a person privy to the development.

The changes proposed in the budget, if approved by Parliament, appear intended to reverse the landmark ruling in favour of Vodafone by the Supreme Court. The court had ruled that the sale of the Indian telecom business of Hutchison to Vodafone Plc was not taxable as the deal took place outside India.

Vahanvati, who had a series of meetings with Mukherjee soon after the verdict in January this year, made it clear that it was the government’s prerogative to come up with retrospective amendments as past changes had been upheld by the apex court.

The person familiar with the matter said the final decision was taken in early February, well ahead of the budget. The prime minister is likely to have been briefed on the matter, said the person familiar with the situation.

Vahanvati Suggested Govt File Review Plea

Besides the retrospective changes, Vahanvati also recommended that the government file a review petition challenging the apex court’s verdict. That petition will be heard on March 20.

“A few policymakers had apprehensions over retrospective amendments, saying it could be a setback to foreign investment. However, the finance minister reckoned that the government was on a strong wicket as the decision was based on the attorney general’s recommendation,” said an official who declined to be named.

In an interview to a TV channel after the budget, Planning Commission Deputy Chairman Montek Singh Ahluwalia had said, “As a general rule, I agree with you that one should avoid retrospective amendment (in laws)”.

“Three judges have given a judgment which is erudite, which is well-considered. You may think it’s wrong, you may think it’s right, (but) to say for removal of doubts (the amendment inserts an explanation for the removal of doubt), as though those three judges didn’t understand the plain language of Parliament. You have not painted your own Supreme Court in great glory in the world. I think the government owed more respect to the SC. I’m not on powers of Parliament; I’m on how instructions work,” Harish Salve, the legal counsel for Vodafone, told ET NOW.

The Supreme Court had ruled in January that Indian tax authorities have no jurisdiction over Vodafone’s purchase of Hutchison’s interest in its mobile telephony joint venture in India with Essar, as the deal was executed through the sale of a holding company registered in the Cayman Islands.