New Delhi: Noted economist Raghuram Rajan has described as "capricious" the government's proposal to amend the Income Tax Act with retrospective effect to bring into tax net Vodafone- type merger and acquisition deals involving domestic assets.
"India has missed a golden opportunity to show its respect for the rule of law even if it believes the law is poorly written. That is far more damaging than any tax revenue it could obtain by being capricious", he said during an address at the Indian School of Business (ISB) in Hyderabad recently.
Rajan, who had served as chief economist at the International Monetary Fund (IMF), is currently professor of finance at the University of Chicago.
He said, "It (government) is capricious. The ideal government would set the rules of the game, and allow an independent judiciary dispute. It would change the rules only when they are clearly broken and rarely, if ever, with retrospective effect".
Rajan said this in reference to a proposal in the Budget to amend the I-T Act to tax overseas deals involving domestic assets with retrospective effect.
The amend seeks to reverse the Supreme Court ruling in the Rs 11,000-crore tax case in favour of UK-based telecom giant Vodafone.
The Finance Ministry defended the decision to tax such deals saying India is neither a zero tax country nor a tax haven.
The key concern with the Vodafone controversy, Rajan said, "is not the government's right to change the law prospectively if it believes it was poorly written and allows an unintended loophole. It is not even the government's right to change the law retrospectively if it believes that everyone knew what was intended.
"The concern is that it intends to change the law retrospectively after the Supreme Court upheld Vodafone's interpretation of the law", he said.
"What is the point of having an independent judiciary to interpret the law and adjudicate disputes between government and business if the government has no need to obey it?
"A government that changes the law retrospectively at will to fit its interpretation, introduces tremendous uncertainty into business decisions, and it sets itself outside the law", he said.
Recently, several global organisations, including International Chamber of Commerce (ICC), BIAC (which represents OECD's business community) have written to Prime Minister Manmohan Singh, Finance Minister Pranab Mukherjee and others, expressing concern over the government's proposed move.
The issue was also raised by UK Chancellor of Exchequer George Osborne with Mukherjee earlier in the month.