BackArun Jaitley plans panel for legacy tax cases
Jaitley rules out any retrospective changes to tax laws, signalling that current dispute will see prolonged battle
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New Delhi: Finance minister Arun Jaitley reached out to foreign investors, many of whom are unhappy over recent tax demands, through a column in the Financial Times, although the solution he suggested, the formation of a panel, is unlikely to please those looking for a more definitive move.
Under pressure from foreign investors over levy of minimum alternate tax (MAT), Jaitley said the government is considering forming a panel to deal with tax cases it inherited from the previous administration.
Jaitley ruled out any retrospective amendments to tax laws, signalling that the current dispute over MAT will see a prolonged legal battle. MAT is a tax paid by profit-making companies that do not pay corporate tax on account of incentives and exemptions.
“Even though it is only the legacy issues that haunt us, we recognize that we must put a quick end to them. I am considering a high-level committee to explore what can be done to resolve the past, and move beyond it in a way that would provide real predictability and certainty to investors. This committee will be instructed to report back expeditiously so that early action can be taken," Jaitley wrote in the column.
“We have fashioned tax policies for the 21st century. Our tax administration cannot afford to lag behind. We will not let it," he added.
Foreign portfolio investors (FPIs) have been battling the income tax department over levy of MAT on capital gains made by them from share transactions. While the tax department has issued demands to 68 foreign institutional investors (FIIs) for payment of dues totalling ₹ 608.83 crore, the total amount is expected to cross ₹ 40,000 crore.
In this year’s budget, Jaitley had announced that capital gains accruing to FIIs will be exempt from MAT. However, this provision will apply only prospectively, despite demands from FPIs for a retrospective exemption from MAT dating back to previous years.
The government has also clarified that foreign investors will continue to get treaty benefits as international tax treaties cannot be overridden by these rulings, though this is likely to benefit only around one-third of FPIs—the ones that route their money through countries such as Mauritius, Singapore and the Netherlands.
Jaitley said the decision to levy MAT on FPIs was taken by quasi-judicial bodies and not by the government, referring to a judgement by the Authority for Advance Rulings that had ruled in 2012 that FPIs are subject to MAT.
Jaitley also ruled out retrospective amendments in the law for the benefit of investors.
“These were created—well before the present government came to power—to reassure investors that the tax system would be free of political interference. But some of the rulings went against foreign investors (others have gone in their favour). We have had little choice but to respect these decisions...the rule of law cuts both ways. We cannot say it is undermined when we take retroactive actions, and at the same time seek to override, retroactively, the decisions of our institutions," Jaitley wrote in the column, adding that the investors could contest these rulings in higher courts.
Jaitley highlighted the steps taken by the National Democratic Alliance government since it came to power in May last year to establish the rule of law and end “tax terrorism", including deferring the general anti-avoidance rules by two years, deciding not to appeal against an adverse high court rulings in the Royal Dutch Shell Plc and Vodafone Group Plc transfer-pricing cases, and stating that the government will not bring in any retroactive laws.
“Yet, to be frank, we have not been entirely successful in convincing investors of the fairness of our tax system. New cases of unexpected tax demands have cropped up, the most recent one being the minimum alternative tax. This has long been imposed on domestic companies. The tax authorities have started claiming payments from foreign portfolio investors, too. It is ironic, and to my government disappointing, that tax issues are damaging our reform credentials precisely when we are on the cusp of modernizing and rationalising our tax policies," he wrote.
Jaitley said that though the government is looking to usher in tax reforms such as the goods and services tax, legacy issues are haunting it.
“But on tax administration, our situation today recalls William Faulkner’s lament that “the past is never dead". It is not even past. All of the disputes now attracting attention are legacy cases: tax demands arising from actions that the tax authorities and the judiciary took before we came to power," he wrote.
Sunil Jain, a partner at law firm J Sagar Associates, said that another committee may not be the solution everyone is looking for.
“We clearly need some action on the ground rather than just another committee. The MAT controversy is rather unnecessary and reminds investors of the previous controversial tax demands, like the retrospective amendments or the transfer-pricing cases involving share transfers. None of them have served the intended objective of revenue collection," he said. “Most of them have been in the news and created an adverse impression about the Indian economy and its image as an attractive investment destination," he added.
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