While, presenting the budget for 2015-16, finance minister, Arun Jaitely had announced government’s decision not to levy minimum alternate tax [MAT] on capital gains made by foreign portfolio investors [FPIs] from investment in securities from April 1, 2015. In his speech, Jaitley had proposed to rationalize MAT provisions for FPIs whereby 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.
Since, the exemption was intended to be applicable only prospectively from financial year 2015-16, the Income Tax [I-T] department served show cause notices on FPIs for the ‘untaxed gains’ made for previous years. This led to flutter amongst foreign investors who felt this was tax aggression. The atmosphere got a surcharged by a mis-calculation that the tax liability could run in to thousands of crores whereas the actual demand notices were for a small around Rs 608 crores on 68 entities.
When, seen in backdrop of retrospective amendment in tax laws initiated by then finance minister, Pranab Mukherjee in 2012 [this was done to negate a judgement of Supreme Court (SC) in Vodafone case which declared untenable tax demand on a transaction in 2007 involving sale of Hutchison shares to Vodafone] and I-T going for a witch hunt raising ‘retroactive’ demands on many similar transactions [involving MNC subsidiaries operating in India and their parents], the investing community thought Modi – dispensation was only pursuing aggressive policy stance of UPA regime.
However, they failed to draw a line and appreciate that Modi – government was indeed different. From the day one of taking charge, it pronounced its unequivocal commitment to provide a “stable”, “predictable” and ‘non-adversarial’ tax policy regime and has in fact, walked the talk. Thus, in the very first budget presented on July 10, 2014, Jaitely enunciated three over arching principles of such a regime.
First, the government made it abundantly clear that it shall refrain from bringing any retrospective amendment to tax legislation in the future. It has honoured this commitment. It has even postponed GAAR (general anti avoidance rules) by 2 years. Besides, the I-T has not raised any fresh demand under 2012 amendment. It has also not appealed against decisions of Bombay High Court (BHC) in the transfer pricing cases of Shell and Vodafone.
Second, the government categorically told tax officials at the ground level that henceforth, they should be circumspect while serving notices and raising tax demands. Where ever, the demand was substantial and involved interpretation of law, they were required to make reference to a high level committee in finance ministry for seeking guidance. Very few such cases have been referred to the committee and hardly any action sanctioned.
Third, only in cases where the matter was pending in the court, the government took a very fair view 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 need to be viewed in this perspective.
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, Jaitely set up a committee under chairmanship of justice AP Shah to look in to the issue.
The committee has recommended that capital gains made by FPIs need not attract MAT even for past period i.e. before financial year 2015-16. The finance minister is reported to have accepted the recommendation and alluded to CBDT [Central Board of Direct Taxes] soon coming out with a notification to clarify the position. Jaitely has also assured that in the next budget, he will make necessary amendment to the Finance Act to provide permanent relief putting any ambiguity in this regard to rest for ever.
Is not the government going over board? Is it not acting in haste? By giving such categorical assurances even while, the matter is pending in Supreme Court [SC], will it not be over-riding the judicial process? What will happen if SC decides to uphold the ruling of AAR?
In such a scenario and the government still going ahead with an amendment to the Finance Act [it will have to having given a commitment now], it will send a wrong signal. It will be open to 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].
While, there can be no two opinions on the end result [FPIs need to be exonerated from MAT on capital gains made on their investment in securities even for the past period as this tax was meant only for domestic companies which were escaping payment of tax by leveraging a plethora of incentives available under I-T Act], the government’s actions should be glided in a manner that its credibility in the eyes of the judiciary is not dented.
For now, it should exercise restraint. It should use the recommendations of Shah committee to cogently argue its case before the SC so that the latter comes out with a favourable verdict. In case, the apex court remain unconvinced, the government will still have the option of amending the Finance Act to give desired relief to FPIs. As the supreme law making institution, the parliament can always exercise its prerogative.
Foreign investors on their part must not pester government in to taking any premature action. They should realize that having themselves taken the subject matter to a judicial platform [read AAR], it is logical that the process be allowed to run its full course. The finance minister’s commitment should be good enough to assure that tax officials won’t chase them.