RETROSPECTIVE TAXATION IS IMMORAL

From Business World of 6 February 2005.

A blunder best buried

never be regained. I believe that it is in danger, and that Mr Chidambaram needs to omit doing something – very soon – if he is to rescue it.What he must not do is to allow the ordinance issued by the law ministry on January 30 to go to Parliament: he must ensure that it is encased in concrete and never sees the light of day again. Under the ordinance, the Central Government takes the power to make rules, including rules conferring the power to issue notifications with retrospective effect under those rules, to carry into effect the purposes of the Central Excise Act, 1944. This must alarm even those who know nothing about law. It means that if you produced something excisable twenty years ago, the government wants to take the power to tax you on it at a rate it decides today. This is not taxation; it is expropriation. It is a power no government ruled by law can or should have, or would dream of asking for.

Why does the government, of which Mr Chidambaram is finance minister, want such a power? It has no intention – at least at the moment, at least this government – of expropriating arbitrary amounts from unspecified producers of the past, although that is what it wants to empower itself to do. It simply wants Rs 8.03 billion from Indian Tobacco Company: it has collected Rs 3.5 billion under duress, and it wants another 4.53 billion, also under duress. The sum of these amounts is the excise duty ITC evaded between 1983 and 1987 according to the government. It is alleged to have evaded the duty by selling cigarettes at a higher price than the maximum retail price that it had printed on the cartons. Its case was that it did not sell them so, that it was retailers who did so. That case was rejected by the Customs, Excise and Gold (Control) Appellate Tribunal, and accepted by the Supreme Court.

Who was right? No one can decide without going through voluminous case records which are not in the public domain; and there is a chance that someone who did so would come to the government’s conclusion, that ITC evaded tax – that it knew perfectly well that the retailers were overcharging, or that it recovered more than the maximum retail price from retailers. Let me assume for the moment that it did so.

Even if it did, it would be wrong for the government to make it disgorge these arrears, for three reasons. First, as I pointed out earlier, to do so the government wants to take power that it should never have – it should not be able to tax anyone with retrospective effect. Tax rates should always be announced in advance, and everyone should know what tax he will have to pay if he produced something. It should never happen that one produced something today and knew only later what tax he would have to pay on it.

Second, the central government must not overturn the Supreme Court’s verdict in this case. If someone argued that the Supreme Court has given some pretty dumb judgments sometimes, it is likely that with all respect, I would agree in some cases. But this is simply not one of those cases: it is not obvious to a reasonably well informed common man that ITC evaded tax. There will be times when the law laid down by the Supreme Court will have to be modified or overturned by Parliament. But this is a judgment on facts, not on law. The Supreme Court has weighed all the facts and come to a conclusion; if ours is a government formed by the Constitution, it should accept that conclusion.

And finally, Mr Chidambaram should scrap the ordinance because he is himself – a man of honour, an officer of the law – and not just another Jaju.