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Business News/ Politics / Policy/  MAT row: Arun Jaitley tears into tax terrorism tag

MAT row: Arun Jaitley tears into tax terrorism tag

Finance minister justifies asking firms to pay up MAT, says India not a tax haven

Investors who believe that a tax demand isn’t warranted have the option of challenging it, said the finance minister. Photo: PTIPremium
Investors who believe that a tax demand isn’t warranted have the option of challenging it, said the finance minister. Photo: PTI

New Delhi: Finance minister Arun Jaitley did some plain speaking on Monday on the issue of tax notices that have displeased foreign investors, saying India didn’t aspire to be a tax haven and every tax demand could not be equated with an act of “tax terrorism" by the government.

“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," Jaitley told a conference organized by the lobby group Confederation of Indian Industry.

Investors who believe that a tax demand isn’t warranted have the option of challenging it, said the finance minister.

Since the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government came to office 10 months ago, the finance minister has promised to end the “tax terrorism" that was perceived to have marked the previous United Progressive Alliance (UPA) regime, which slapped aggressive tax demands on foreign companies operating in India.

Jaitley has also repeatedly said that his government will not introduce retrospective tax laws (the UPA did, in an attempt to tax Vodafone Group Plc.). Ironically, some of the recent angst of foreign investors arises from a tax amendment that provides them relief and which they want to be applied retrospectively.

Chatter about the government’s approach to taxes picked up after Cairn India Ltd, a subsidiary of Anil Agarwal’s Vedanta Resources Plc., said last month that it had been slapped with a capital gain tax demand of 20,495 crore by the income-tax (I-T) department—double the sum sought from UK-based Cairn Energy Plc. The government clarified that the demand arose from a process initiated during the UPA’s tenure.

The tax department also issued notices to nearly 90 foreign portfolio investors (FPIs) for a sum of 100 crore to pay minimum alternate tax (MAT) for the 2012-13 assessment year in the past few months and is expected to broaden its net to include an additional 6,000, according to the Press Trust of India.

This year’s budget proposed to exclude income of FPIs in relation to capital gains (other than short-term capital gains not subject to securities transaction tax) for the purposes of levying MAT, a tax paid by profit-making companies that do not pay corporate tax on account of incentives and exemptions. Such companies pay a fixed proportion of their book profit as MAT.

Jaitley in his 2015-16 budget speech proposed to rationalize the MAT provisions for FPIs; profits corresponding to their income from capital gains on transactions in securities, which are taxed at a lower rate, would not be subject to MAT, he said.

Finance ministry officials later clarified that this would be applicable only prospectively from financial year 2015-16. However, FPIs contend that they are not liable to pay MAT even for previous years.

“Even when legitimate taxes are demanded when courts have settled issues, amendments have been made for the future; if people are aggrieved, they have the right to challenge it," Jaitley said on Monday. “But having lost in courts, you cannot refer to the process as tax terrorism."

The legal position on the issue is clear, revenue secretary Shaktikanta Das said on the sidelines of the conference.

“The law will naturally apply for the prior period. The amendment proposed will take place from 1 April 2015," Das said. “So prospectively, there will be no MAT on the FPIs, but the prior period demand is confirmed by the advance ruling authority, so naturally it will stand."

There is no dispute that under the way the income tax law has been written, MAT is applicable to both domestic and foreign companies, said Sunil Jain, tax, customs and trade partner at J. Sagar Associates, a law firm.

However, the differences are more about economic policy rather than a technical interpretation of the language of the law, he said.

“In an assessment scenario, when you have provided helpful clarification in the income tax bill for future years, generally tax officials lose interest in the past cases. With such huge tax demands, obviously, the government will be mired with long term battles with the FPIs on the issue," Jain said.

“If the government does not resolve the matter during the budget discussion in the second part of the budget session, this will lead to another unfortunate Vodafone or GAAR (general anti-avoidance rule) kind of development," Jain added. “Confidence of foreign investors was slowly coming back with the small positive steps taken by the government. But with this kind of measure, the sentiment could again turn negative."

GAAR, first introduced in 2012 was a controversial tax rule that attracted the ire of investors.

In his budget speech in February, Jaitley introduced a number of foreign investor-friendly measures, including deferring GAAR by two years. The budget also nuanced the indirect transfer provisions in the I-T Act to provide clarity to foreign investors on the taxability of merger and acquisition transactions in India, where shares are transferred outside the country although the underlying asset is in India.

The finance bill also proposes to bring only those indirect transfer transactions under the capital gains tax net where 50% of the value of all assets owned and controlled are located in India. Also, only those transactions where the value of assets exceeds 10 crore will come under the tax net. It also clarified that capital gains tax will be levied only proportionately on the gains that have accrued from sale of the Indian assets.

But despite these steps, complaints about the aggressive demands by taxmen have persisted.

Jaitley defended the government’s move to introduce a new black money legislation in Parliament to recover all unaccounted money, stashed in overseas banks by Indians on which no tax has been paid, as part of an effort to bring tax evaders to book.

“Legitimately, when we are trying to rationalize rates and bring them down to 25%, there is no reason why anyone should indulge in that misadventure," the finance minister said. “Therefore, since it is a new tax being imposed, all suggestions regarding the compliance window, the manner and extent of compliance are welcome."

The Undisclosed Foreign Income and Assets (Imposition of Tax) bill, 2015, proposes up to 10 years of jail for concealing foreign assets and income, and evasion of tax on these. Banks and financial institutions that abet concealment will also be liable for punishment of up to seven years, as the government seeks powers to bring such errant financial institutions to task. It also proposes a stringent penalty to be imposed on tax evaders.

“The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon, i.e., 90% of the undisclosed income or the value of the undisclosed asset. This is in addition to tax payable at 30%," a statement from the income tax department had said last month.

The government has also proposed to provide a short compliance window to tax evaders to declare their foreign income and assets without being prosecuted under the stringent provisions of the new law.

“Globally also the regime is getting extremely challenging. In next two years, the G-20 initiative of automatic exchange of information is going to take shape. India has decided to become a signatory to the US law FATCA (Foreign Account Tax Compliance Act). The disconnect with the past will surely come. Therefore, rather than wait for that opportunity, where people run into trouble and then say targeting undeclared, undisclosed income abroad is terrorism, it would be in everybody’s interest that the rule of law is complied with," Jaitley said.

Jaitley also emphasised the need to review the Prevention of Corruption Act to make the decision-making process fearless, where errors in decision making could be distinguished and dealt with separately from corruption in decision making.

“The liberalization process started in 1991. The language of the present Prevention of Corruption Act which was drafted in the pre-liberalization era of 1988 is deterring a large number of public servants, particularly civil servants, from taking decisions. The law commission has sent its recommendations that in the changed environment, it requires a relook," he said.

“Therefore, a large number of criminal cases, both against industry and decision makers, which have recently, in last few years, disrupted the economic and business environment in this country, require to be seriously addressed looking at the language of that."

Remya Nair contributed to this story.

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Published: 06 Apr 2015, 12:43 PM IST
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