The ‘second National Bank of the United States’ was created by the Federal Government in 1816. Many state governments resented the bank for calling in loans it had made to them. Consequently, some states passed laws designed to hinder the bank’s operation. Others simply tried to tax it. Maryland imposed an annual levy of $15,000 on the bank, hoping to tax it out of existence.
When the challenge to the tax reached the Supreme Court, a unanimous Court speaking through Chief Justice Marshall held that the tax was invalid. The Court also used a phrase that has come to be one of the enduring clichés of taxation law: “The power to tax involves the power to destroy.”
If the events leading up to it and the judgment in the ‘AGR case’ are anything to go by, it’s a cliche that the Indian government and the Supreme Court have taken to heart.
The National Telecom Policy of 1999 introduced the ‘Adjusted Gross Revenue’ model for payment of license fees. Under the policy, a percentage of the telecom companies’ AGR was to be shared with the Government as license fee. Initially, the percentage was fixed at 15 per cent. It was capped at eight per cent in 2013.
Litigations that have led to the October 2019 Supreme Court judgment started in 2003. They revolve around the definition of the term ‘Gross Revenue’. The companies argued that the definition of gross revenue for the purpose of levy of license fee could only be related to such receivables that arose out of ordinary telecom related activities. The Government’s stand was that license fee was payable on overall revenue (including revenue realised on account of non-telecom activities).
The telecom companies further argued that 80 per cent of the license fees demanded by the Government had been paid. Payment of the remaining amount had been stayed by the Court. Non-payment was due to a bonafide dispute, and under protective orders of Courts. Thus, if the Court found that the Government’s definition of gross revenue was correct, the companies would only be required to pay the remaining license fee. Penal consequences like interest or penalty could not be imposed. The Government argued that it was entitled to interest and penalty.
The Court upheld the Government’s stand on both counts. As a result, the telecom companies are required to pay a total of Rs 1.3 trillion (92,000 crore in licence fee, and 41,000 crore as spectrum usage charges) to the Government. Only 25 per cent of this amount is the actual sum owed by the companies. The rest is in the form of interest and penalties.
The reasoning behind the verdict is dubious. How can licenses fees be paid on non-telecom revenues? It also raises the larger question of the Court’s role in determining issues that have a significant impact on the economy – issues that it is admittedly ill-equipped to handle. While a fair share of the blame for the crippling effect the Judgment is likely to have on the telecom sector lies on the Court, an equally large share of the blame lies at the doors of the Government for poor handling of the issue.
The Supreme Court and the economy
The Supreme Court has traditionally been regarded as the arbiter tasked with the mechanical duty of applying the law and interpreting the Constitution. Economic matters remain outside its domain – and expertise. A wide and somewhat erratic exercise of the power of judicial review has meant that matters with serious economic consequences often reach Court. In a 2017-judgment, the Supreme Court held that it is the “bounden duty of the Court” to keep in mind the economic impacts of its decisions. However calls for such an economic analysis remain a voice in the judicial wilderness.
There have also been instances where the Court has departed from the tradition of deference to legislative/executive policy, in order to actively participate in charting the course of the economy. A key example of this was the Supreme Court’s cancellation of 2G licences given to 122 telecom companies. The catalyst of the affair was a figure of Rs 1.76 trillion—the CAG’s estimate of the notional loss to the exchequer in the allocation of 2G licences. The figure was based on dubious assumptions. Crucially, both the CAG and the Supreme Court reasoning began with a faulty premise: that the government’s guiding principle should have been revenue maximization.
Considering that the Indian economy relies on foreign and local investments, the implications of such Court action are serious. The Court’s “interventionist” and “legitimizing” roles send conflicting signals to the business sector. Already having to contend with a vast executive bureaucracy, the sector is forced to face years of uncertain legal proceedings. Often a win in Court does not mean relief – because the Government remains free to retrospectively amend the law – as it did with its tax demand on Vodafone.
The Government’s handling of litigation
Economic policy seeks to regulate relations rooted in an atmosphere of negotiation, flexibility, and trade-offs. Guided as it is by the rigid rule of precedents and concrete constitutional principles, a court is not the best forum to handle such issues.
In the immediate aftermath of the AGR Judgment and the dismissal of petitions seeking review of the same, the Government is trying to find ways to offer some succour to the telecom companies. The Finance Minister is on record saying that she is waiting for the Telecom department’s stand on the issue. Reports also indicate that the Reserve Bank of India has requested the government to provide some relief to the telecom players on clearance of the dues, in order to save banks from exposure.
It is reasonable to assume that these issues were known to the Government when it escalated the matter to the Supreme Court. However its actions (to borrow an expression used by the late Mr. Palkhivala), are “a triumph of bureaucratic obstinacy over good sense.” The Supreme Court does not seem to have been informed of the economic fallout of its decision. The 153-page judgment does not speak of its likely impact on the economy even once.
The judgment is likely result in Vodafone-Idea shutting – leaving behind a private sector duopoly. The government itself stands to lose a large part of the sum that it is owed. The option of a retrospective amendment still remains. Given the likely political ramifications of the same, it is unlikely.
Chief Justice Marshalls’ cliché about taxation was tempered by later judges. It was put to rest by the great Justice Holmes with the trenchant observation that “the power to tax is not the power to destroy while this Court sits.” It’s a message that does not seem to have reached our Supreme Court; or our government. And that does not augur well for the investment climate in our country.
The authors are lawyers who practise in the Supreme Court. They tweet @sanjayuvacha & @parahoot
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.