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Corporate May 9, 2012

FM claws back policy space from SC in Voda: 2G next?

By Blog

By R Jagannathan

Two important signals came from the Union government on Tuesday.

First, Finance Minister Pranab Mukherjee, despite making some concessions on the Union budget, stood firm on the law to tax Vodafone-like offshore deals with retrospective effect. Second, later in the evening, the government also withdrew its request to the Supreme Court for a review of the 2G verdict which said all natural resources must be sold through auction.

Is there a connection?

Let's start with the finance minister's statement. He expressed the government's resolve to go after Vodafone for not deducting tax on capital gains made by Hutchison Whampoa when the latter sold its Indian telecom operations. Mukherjee said: "I would like to be guided either by a double tax avoidance agreement or domestic tax law. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin." India was not a tax haven, he added. (Read this, too)

But Mukherjee said more. By passing his retrospective tax proposals, he will essentially be seeking to overturn a Supreme Court verdict which Vodafone won last January.

AFP

This is where Mukherjee made a more significant statement: that courts can only interpret the law. The legislature will not cede its power to legislate.

According to The Hindu, he said: "I am fully aware of my right as a legislator; law-making power only vests in parliament. The Supreme Court may interpret law but equally parliament has the right - the legislative right - to express its intention by making amendments to correct the Supreme Court judgment." Parliament exploded with a thunderous ovation. This shows parliament's unhappiness with the courts encroaching on their domains.

This is where the withdrawal of the 2G review petition comes in. This has been interpreted by Prashant Bhushan, one of the original public interest litigants in the 2G case, to claim victory. He believes that the withdrawal of the review petition means that the government will not challenge the Supreme Court's view in the 2G verdict that all natural resources should be auctioned.

On 2 February this year, the court cancelled 122 licences issued by A Raja and said in future spectrum and, all scarce natural resources, should be auctioned. The review petition was to seek a clarification on whether the auction point was only about spectrum or every natural resource.

However, if one were to put Mukherjee's views on parliament's powers and the withdrawal of the review petition together, one could also interpret it as a new move by the government to claw back its legislative powers.

Only time will tell if this is true, but a key test case is the spectrum pricing formula proposed by the Telecom Regulatory Authority of India (Trai), which has been roundly condemned by the telecom industry and also questioned by the Telecom Commission.

A key element in the Trai recommendation is auction of spectrum - but there are huge revenues and vested interests at stake. The government is unlikely to be able to solve the problem and resolve conflicting interests without having the flexibility to decide what is the optimum policy mix for the sector. Not everything can be decided by auction.

The withdrawal of the 2G review petition - but not the presidential reference on various issues emerging from the 2G verdict - could be one of a piece with the government's new assertiveness on the right to make policy.

There is a realisation in government that accepting the Supreme Court's stand on everything may contribute to a kind of policy paralysis on its own.

Maybe, just maybe, Mukherjee has shown UPA-2 the way forward out of policy paralysis.

by Blog

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