Don’t override judicial process

Since the exemption was intended to be applicable only prospectively from financial year 2015-16, the income tax department served show -cause notices on FPIs for the ‘untaxed gains’ made for previous years. This led to a flutter among foreign investors who felt that the Modi dispensation was only pursuing aggressive policy stance of UPA regime (the atmosphere got a surcharged by a miscalculation that tax liability could run in to thousands of crores of rupees whereas  actual demand notices were for a small, around Rs 608 crore on 68 entities).The FPIs contended that they were not liable to pay MAT even for previous years; in other words, they wanted to have the benefit of exemption retrospectively. Jaitley had then dismissed their claims as completely untenable saying in a conference organised by the CII: “An emerging economy (like India) that expects investment cannot really indulge in tax terrorism or aggressive tax policy. But, our fairness is partly misunderstood. The converse of tax terrorism is not being a tax haven”.

The stance was in consonance with three over arching principles enunciated by Jaitley in his first budget presented in 2014. First, he proclaimed that the government shall refrain from bringing any retrospective amendment to tax legislation in the future. Second, tax officials were categorically told to be circumspect while serving notices. Wherever the demand was substantial and involved interpretation of law, they were required to make reference to a high level committee in the Finance Ministry for seeking guidance.  Third, only in cases where the matter was pending in the court, he reiterated that judicial process will be allowed to run its course.

The show cause notices served on FPIs for the ‘untaxed gains’ made for previous years was in sync with the third principle. Castleton Investment Limited (CIL) – an FPI based in Mauritius – had in 2010 taken up with the Authority for Advance Rulings (AAR) the issue of MAT on capital gains made by it from investment in Indian securities.

In 2012, the AAR ruled in favour of the tax authorities (CIL challenged it in Supreme Court). In this backdrop, the action of I-T was perfectly justified. Yet, keeping in mind the prevailing sentiment, Jaitley set up a committee under the chairmanship of Justice A P Shah to look in to the issue.

The committee recommended that capital gains made by the FPIs cannot attract MAT even for past period, that is, before financial year 2015-16. The finance minister has accepted the recommendation and directed authorities not to chase the FPIs on whom notices have been served. He has also promised to come out with an amendment to section 115J of the Finance Act to exempt all FPIs not having permanent establishment in India from levy of MAT.

By giving these assurances, the Narendra Modi government has done a volte face. It has not only gone back on the principle espoused by it but also pre-empted the judicial process (the matter is yet to be heard in apex court). It will send a wrong signal and will be open to the charge of inserting a retrospective provision in law purportedly to favour foreign investors. It will look no different from UPA which also made a retrospective change in law in 2012 (though that change went against foreign companies).

Domestic companies

True, in the backdrop of the recent global meltdown, triggered by happenings in China, and the Indian stocks receiving a drubbing, the government was keen to announce a decision that would sustain FPIs interest. But, that cannot be at the cost of compromising on the principle and that too when the finance minister only a few months ago had stoutly defended its decision then to allow the judicial process to run its full course.

There can be no two opinions on the end result. As the Shah panel has cogently argued, the intent of MAT was to capture domestic companies which were getting away by paying no tax at all or paying much less than provided under the I-T Act by leveraging a plethora of incentives available under the Act.

It was not meant for the FPIs which do not have a permanent place of business in India and are not required to write their accounts as per the Company Act. Yet, the government’s actions should be glided in a manner that its credibility in the eyes of the judiciary is not dented.

For now, the finance minister could have exercised restraint. It should use the recommendations of the Shah committee to argue its case before the Supreme Court and get a favourable verdict. In an extreme scenario, if SC remain unconvinced, the government will still have the option to amend the Finance Act to give desired relief to FPIs. As the supreme law making institution, parliament can always exercise its prerogative.

Any apprehension that judicial process would have taken time is ill-founded (whereas, the government needed to bring about “certainty” of policy environment at great speed). This is because the matter is already slated for hearing by the SC in this month itself. Even so, the track Jaitley has taken will not give FPIs 100 per cent certainty till the amendment in the Finance Act comes through. And, that is not going to happen tomorrow.

(The writer is a New Delhi-based policy analyst)