High handed

The government's decision to issue an ordinance with retrospective effect from 22 years ago, simply in order to avoid paying back cigarette major ITC the Rs 350 crore (plus interest) of disputed taxes after it lost its excise case in the Supreme Court, smacks of high-handedness.

By changing the rules on how cigarettes are to be taxed right from March 1, 1983, the government has cocked a snook at the Supreme Court which ruled in ITC's favour last October -- you may have won the case by the rules as interpreted by the courts, but we can change the rules, is what the government has just said.

That there is legal precedent for changing tax laws with retrospective effect is not the point, because the material fact here is that the government fought a long legal battle over 17 years and lost.

Instead of accepting defeat gracefully, it has sought to change the goal posts.

Whether ITC and the other cigarette companies that have been affected will now fight a fresh legal battle, and what the outcome of such a battle will be, remains in the realm of speculation.

But the government should consider the consequences of its action. First, it comes across as a bad loser""and gives the message that you pick a fight with the government at your peril.

Second, by changing tax laws that reach back all of 22 years, the government has introduced a new level of uncertainty into corporate calculations; for companies are expected to factor in uncertainty about the future, they can hardly be asked to be prepared for uncertainty about the past as well.

While the government will defend its actions by citing precedent--since retrospective changes have actually been made several times before--surely companies will wonder about the ultimate validity of the frequently made point that while China does not have a legal system worth the name, India does.

The tax authorities already have a poor reputation for delaying refunds after rulings against their tax claims, often by arguing that the case is 'time barred' or involves 'unjust enrichment'.

Indeed, things reached the stage that in January, the Supreme Court had to come down on this practice and ordered that the government pay penal interest on such delays in refunds and even take appropriate disciplinary action against the officers responsible for these delays.