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Monday, May 18, 2015
Breaking It Down: MAT = Tax Terrorism
[Editor: Last month there were media reports that the Indian Finance Minister Mr.Arun Jaitley, rather jocundly said that the opposite of tax terror cannot be a "Tax Haven". Pointing finger to his critics, he asserted that Modi government would not let go off what it sees as a "Legitimate Tax Demand". Mr Jaitley was infact referring to the tax notices served on FIIs and FPIs to extract Rs.40,000 crore from them (after they lost an appeal at the Authority for Advance Rulings (AAR) against levy of 20% MAT on capital gains they made in years through March 31) under a tortuous law called Minimum Alternate Tax (MAT). The Indian FM was probably unaware as how this sounded when Indian IT-department is already infamous for arbitrariness. MAT brings out this infuriating arbitrariness quite succinctly. This is a simple example, of Mr.Arun Jaitely amateurish gibes, a person who is in charge of managing trillion dollar Indian economy. It is pertinent to mention here that, last month, the eminent banker Deepak Parekh had said impatience has begun creeping in among businessmen as nothing has changed at the level that matters in the first nine months of the Narendra Modi-led government]
Empirical evidence backs the changing mindset of foreign investors after the overhang of retroactive taxation appeared. In April 2015 FIIs made net purchases amounting to Rs 7,864 crore while in May, it has been the reverse, with FII outflows totalling (-) Rs 5353 crore. The trajectory undergoing a shift, from buy to sell.
Sentiment turned as investors were once again spooked by tax terrorism. Retrograde, regressive and retrospective tax claims have tarnished India’s image over the last several years. Retro claims against global MNC heavies leaving a pall of gloom in their wake. The worst part is that there is no definitive answer to tax terror. We love keeping things in abeyance, putting elephants and camels under the carpet, wishing that they go away. Investors don’t want turbulence, they are looking for continuity. Genuine claims are understood, but retroactive are unacceptable and they allow the tax man to run riot by sending notices. In an age of ease of doing business, inspector raj is back with a vengeance.
And as if all this wasn’t enough to contend with, the government has failed abysmally on the legislative front. Two show piece bills, material to reform – Land Bill and the Goods and Services Tax bill – have seen no bipartisanship in the tower of babble called parliament. Instead they have now gone into a tailspin referred to select and joint committees and pushed back to the next session of parliament. Volatility, confusion and lack of stability through continuum in tax policies is worrisome for the investor community.
News just coming in seems to suggest that a Hong Kong-based lobby group representing global banks and investors is considering challenging the controversial tax in the Supreme Court, escalating a row that has eroded foreign investor confidence in Prime Minister Narendra Modi’s government.
Reuters is reporting that the Asia Securities Industry and Financial Markets Association (ASIFMA) is in confabulations with financial firms, lawyers and tax consultants about applying to join an existing legal action on a tax dispute.
The existing Supreme Court case, filed by Mauritius-based Castleton Investment Ltd, is seen as a test case on the legitimacy of extending the so-called minimum alternate tax (MAT), which was intended to ensure companies inside India paid a minimum tax rate, to foreign investors’ gains.
The government has conceded that MAT will not apply to such gains from April 2015, but the tax authority is pursuing claims for past years.
Castleton’s hearing was brought forward to August to achieve a quicker resolution of the issue. The court can deny ASIFMA’s application if it rules it does not share enough in common with the Castleton case, which deals with broader tax-related issues. If accepted, it would be the first time an overseas lobby group has challenged India’s government in its top court. Foreign investors have been working together to fortify their opposition.
Clarity of policy and thought process is crucial. Even as Modi traverses the globe making promises, the ground realities back home are far different. The tyranny of numbers in the Rajya Sabha being what it is legislation will always be that much difficult, so executive order which doesn’t require legislative ratification is the way forward. But in the mean time, let us not complicate our lives with unnecessary tax and inspector raj or retro taxation.
Courtesy: Focus News