Time and again, top brass in the government has lamented at the woefully inadequate infrastructure at all layers in the judicial hierarchy vis-a-vis the ‘mindboggling’ number of pending cases [and still ever increasing]. Accordingly, the ministry of law justice and company affairs has asked the Supreme Court [SC] and all High Courts to fill existing vacant positions besides increasing the bench strength to fill the void.
But, has the government ever bothered to examine as to why the cases have proliferated? In how many cases, the state or any of its organizations are involved? Could the authorities have prevented cases from moving to court? Is a maze of ambiguous laws and rules/regulations alone responsible for this? Or is there something fundamentally wrong with the attitude of bureaucrats?
No doubt, ambiguous laws and rules/regulations that are susceptible to multiple and varied interpretations would find a place on top of the chart. But, the over-arching cause is the inherent tendency of bureaucrats to deflect the matter to court at the drop of a hat. This is also exacerbated by fear of facing departmental action or even prosecution especially when the subject matter involves revenue implications for the state.
In this regard, two living examples even from a progressive state like Gujarat [from where the prime minister hails and is often cited as a model of development to be emulated by others] would illustrate as how the judiciary is unnecessarily burdened with avoidable workload [besides locking up manpower in government machinery which could have been used productively in growth and welfare oriented work].
The first relates to the demand for sales tax for a total of Rs 4000 crores raised by Gujarat government on three companies viz., British Gas [BG], ONGC and Reliance Industries Limited [RIL] for the period 1998-2015 which had entered in to a production sharing contract [PSC] with central government for capital investment and exploration of oil & gas. The demand is in respect of gas brought by these companies from the Panna-Mukta-Tapti [PMT] field situated off the west coast of India.
The state government had assessed sales tax of around Rs 1500 crores from 1997 to 2001 on the aforementioned contractors stating that the gas was delivered and sold to Gas Authority of India Limited [GAIL] from the territorial region of Gujarat. But, the companies contested the notice on the ground that the Gujarat government has no jurisdiction to levy sales tax on them because the delivery point is located 32 nautical miles away from Hazira port in Surat and hence, it does not fall within the territorial waters of India and is also outside Gujarat. BG even went that far to say the gas is technically an import as it could have gone anywhere in the world but due to contractual obligation with GAIL, it was brought to Hazira.
The stance taken by the companies was completely flawed? The GOI which is signatory to PSC had issued a notification to apply the provisions of Customs Act to Panna-Mukta area. That is because the area falls very much within the territorial waters of India or exclusive economic zone [EEZ]/ continental shelf and consequently, production of gas from the fields therein is very much within India. The PSC also clearly states that sale has taken place onshore at Hazira in Gujarat. Therefore, the state government was perfectly justified in raising demand for sales tax.
Even so, the position taken by BG is preposterous. Its stance that the area does not fall within the territorial waters of India would lead to an absurd conclusion that it belongs to some other country? An item can be treated as import in to territory of India only if it is brought from some other country. In this case, gas is produced in an area that is strictly within Indian territorial waters and bringing it to land surface cannot be deemed as import?
Yet, one gets flummoxed by a judgement of Gujarat High Court [GHC] [May, 2015] rejecting the state government contention saying that gas sales have not taken place within Gujarat and Gujarat government had no authority to levy the sales tax under the provisions of the Gujarat Sales Tax Act, 1969 on the transaction [it even asked the government to refund the amount with interest @ 9% per annum deposited by the contractors while seeking interim relief]. On July 16, 2015, the latter moved the SC against this decision.
The issue could have been resolved through discussion and proper coordination between the three parties viz., Gujarat government, GOI and the three contractors. An appropriate and ‘timely’ clarification issued by the central government on the territorial status of Panna-Mukta; that production of gas and its sale is very much within India [Gujarat] would have prevented this long drawn battle which is still continuing.
In sharp contrast to above where private companies are on a wrong footing, there is another case where Gujarat government took an absolutely illogical and untenable stance. This concerns levy of royalty on crude production by ONGC. Briefly, the position in that case is as under:-
Since October, 2003, under directions from then government at the centre, ONGC and Oil India Ltd [OIL] offered discount on supply of crude to downstream oil PSUs viz., Indian Oil Corporation [IOC], Hindustan Petroleum Corporation [HPCL] and Bharat Petroleum Corporation [BPCL] to cover a portion of under-recoveries that latter incurred on sale of LPG, kerosene, diesel [up to October, 2014] and petrol [up to June, 2010] at prices below cost of production.
According to Oil Field Act (OFA), ONGC is required to pay royalty @ 20% on market value of crude oil it extracts from oil blocks/fields to state government. Because of discount, while ONGC was getting less, Gujarat government insisted on royalty payment on pre-discount price. Between October 2003 and March 2008, ONGC obliged, but thereafter under directions from centre, it started paying royalty on price net of discount. The state filed an appeal against this in GHC which allowed its demand for royalty even on the discount. As a result, ONGC is saddled with a huge liability of Rs 10,000 crores for the period 2008-2013!
Charging royalty on discount/subsidy too is illogical. A levy can be collected only on sale price. Subsidy is clearly not a part of sale realisation. Therefore, it cannot be subject to tax. Doing so will have astounding implications.
Consider market price of crude $106 per barrel [in early 2014]. The sale price post-discount is $32 per barrel. If royalty of 20% is imposed on pre-discount price, this will work out to $21.2. The effective royalty rate would be 66% (21.2/32)! How can state charge royalty at a rate higher than prescribed under OFA?
The action by Gujarat government has a precedent. In 1988, Tamil Nadu, Andhra Pradesh [AP] and Kerala raised demand for sales tax on subsidy received by fertilizer manufacturers under erstwhile retention price scheme (RPS) with retrospective effect, e.g., from 1982-83 to 1987-88, in case of Tamil Nadu. As in oil, GOI controlled selling price of fertilizers, keeping it at a low level. The cost of production and distribution being higher, excess amount was reimbursed as subsidy. This was to compensate producers for loss they would have incurred due to low price.
Subsidy is not a part of realization from sale and therefore, imposition of sales tax is illogical. Indeed, high courts in AP, Kerala and Uttar Pradesh held that ‘demand for sales tax on subsidy was untenable’. Those judgements were upheld by Supreme Court. Sales tax authorities in Gujarat too had raised demand for tax on subsidy. However, state government—through a circular issued under Gujarat Sales Tax Act (1969)—directed officials not to press for the same. While, other states corrected the wrong through judicial intervention, Gujarat did it on its own. Why then, with regard to royalty on discount given on sale of crude—where underlying fundamentals are same – the state government went in a reverse gear with GHC giving its stamp of approval?
Like the above two cases, there are thousands of others where the governments are locked in court battles with public sector undertakings [PSUs] or their joint ventures with private companies. There are also instances of two or more PSUs caught up in legal wrangling between them. Such squabbling is a losing proposition for all stakeholders viz., companies, government and the courts except corporate lawyers who strike a gold mine raking in millions of Rupees from every case.
Both the government [centre and states] and corporate sector should jointly make efforts to defuse all the ‘triggers’ that lead them to the court room. The Prime Minister has made a good beginning by setting in motion a process of repealing all archaic laws. In a second major move, he is creating the right ambience for bureaucrats to take bold decisions [amendments to the Prevention of Corruption Act (1988) already approved by cabinet will give ‘honest’ officials a big boost; for details, pl see link below].
Third, there is an urgent need for an institutionalized and well lubricated mechanism for inter-ministerial/departmental [with central PSUs under their respective jurisdictions] consultations to resolve potential issues. Private companies which are partners with PSUs under joint ventures where ever necessary should be roped in. Fourth, state governments must be made an integral part of these consultative mechanisms as hundreds of cases involving humongous amounts pertain to sales tax/VAT. The states should also have in place their own mechanisms to coordinate with state level PSUs.
The government may also use the NITI [National Institute of Transforming India] Aayog platform – the epicentre of cooperative federalism under its present avatar/incarnation – to iron out big disputes between the state and central PSUs. For instance, the aforementioned case of royalty on crude discount that involves a liability of Rs 10,000 crores on ONGC can be sorted out on this forum instead of allowing this matter to languish in apex court.
Finally, Modi should vigorously pursue the process of streamlining and simplifying the laws and rules/regulations so as remove the ambiguities – that being one of major causes pushing various entities to the court room. The state governments will have to take up similar streamlining and simplification exercise. They should also be alert to new areas like e-commerce that could open up a minefield of litigation if timely action is not taken to lay down clear- cut rules and amend laws if need be. For details, pl read:-
In short, a multi-pronged strategy and holistic action plan involving all stakeholders is the need of the hour to un-burden the judiciary which will also bring collateral benefits to the state via increased flow of revenue and healthy budgetary position.