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Suresh Krishnamurthy

With the Union Government issuing an ordinance to nullify the apex court ruling in the ITC case, the stage appears set for a legal battle, the outcome of which will set the boundaries within which the Government can act.

"ONE of the first things you learned in law school was that the law was not about truth. It was about dispute resolution. In the course of resolving a dispute, the truth might or might not emerge".

Thus reminisces a character in the novel `State of Fear' by Michael Crichton. Many of us would sympathise with such a sentiment having seen the course taken by many a dispute. Governments the world over are very volatile animals. They can be benign but can flex their muscles with severe consequences.

Also with powers to make law, governments can win battles lost in the court by extra-judicial initiatives.

For instance, the Union Government issuing the ordinance to retain Rs 350 crore and recover another Rs 450 crore from ITC. The ordinance that nullifies an apex court ruling has boxed ITC into a corner — cough up or face the consequences.

As can be expected, this heavy-handed response has been roundly criticised by Corporate India.

The Government, however, may have reason to feel aggrieved by the court ruling. It can legitimately claim that ITC's victory was on technicalities and that it deserved the Rs 800 crore duties payable on the sales value.

But this does set a bad precedent, and could be resorted to under less justifiable circumstances. Besides, ITC played by the rule and won.

A subtler approach

It is also not clear as to why the Government felt the need to crush ITC and the ruling with the ordinance. One, this does not guarantee the receipt of Rs 800 crore as this will certainly be challenged in the court, leading to increased litigation costs. Second, it was always possible for the Government to raise excise duties in the coming Budget and make up for what it had lost in this case.

The Government is the biggest beneficiary of the cigarette trade. Out of every Rs 100 earned from sale of cigarettes, the Centre gets about Rs 50. After the State levies such as sales tax, octroi and entry taxes, the cigarette companies earn only about Rs 10 as profits.

The industry is heavily taxed, but there is room for more. For instance, ITC still earns a return on net worth of about 100 per cent from its cigarette business. Cigarette companies also received a bonanza recently when the apex court struck down the levy of luxury taxes by several States.

Surely, several Chief Ministers will be envying the power of the Central Government to use extra-judicial means to recover money from the industry.

The outcome of the ITC case is the clearly enhanced scope for increasing excise duties. Even the cigarette industry will not object to this if it is accompanied by a disproportionate increase in duties on such products as gutkha and bidis.

A crackdown on smuggling and levy of even higher import duties on cigarettes too would be in order.

These measures would satisfy the cigarette industry and also lead to a substantial increase in excise duties from the tobacco industry. Perhaps, a subtle and nuanced approach was possible.

Settlement would be fair

The Government may, however, have come too far down the wicket and have no option but to take its chances.

The stage does seem set for a legal battle, the outcome of which will set the boundaries within which the government can act. ITC can expect the moral support of almost the entire corporate sector.

Much as the financial world will be waiting impatiently for the Supreme Court's pronouncements on the legal validity of the Government's move, a settlement between ITC and the Government (which would take the apex court out of the picture) may be a more suitable outcome.

A settlement wherein the Government gets to keep the Rs 350 crore that ITC has already deposited and the company not coughing up the Rs 450 crore.

That way, the Government's feeling of a legitimate claim being thwarted could be assuaged.

At the same time, ITC could still savour the hard-fought victory, if such an outcome emerges, by distributing a handsome dividend to its shareholders.

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