Bad economics, bad polite Sadly, the BJP government is getting caught in the tax follies of the past. Unfortunately, over the last couple of years the two issues from India that have generated maximum news overseas have been the retrospective demands by the tax authorities and the number of rapes in public places. The retrospective rules have severely impacted India’s image as a safe place to do business. And the cases of rape have impacted India’s image as a safe destination for women tourists.
First there was the well known and widely discussed Vodafone case which the government lost in the Supreme Court, but then tried to overcome by retrospective amendments to the tax law. And now in recent weeks there has been the demand retrospectively for the Minimum Alternate Tax (MAT). The tax authorities have chosen, based on one ruling of the advance authority of tax rules, to reopen the cases of many Fils across the board, for several years past, and demand payment of MAT.
Both the minister of finance Arun Jaitely and his minster of state Jayant Sinha have been at pains to explain in various forums, both in India and overseas, again and again, that the present government does not intend hereafter to levy tax demands retrospectively. But where notices have been issued by the tax authorities under the law as it stands, they would have to be litigated and decided upon in the courts of law. They also add that the government has a sovereign right, in appropriate cases, to pass tax legislations which apply retrospectively.
It is nobody’s case that our government, like any other government does not have the right to pass tax legislation that applies retrospectively. Several western governments assert the same right. While it may lead to inequity, sovereign right is difficult to deny.
But having said this it is difficult to understand, let alone justify the ministers’ insistence that the demands raised by the authorities on the Fils for MAT for the years past, be fought through and litigated to the bitter end in the courts. Especially since when most Indians, let alone foreigners are resigned to the endless time taken for cases to wind their way through our courts.
If MAT is not applicable to Fils in the future there is little justification for raising demands for the past. Also, in all likelihood, it is misreading
of the law to say that all companies, wherever incorporated, are liable to MAT in India. It is obvious, under commonly accepted principles of international law, that the government legislation can only apply to companies which are incorporated in India or doing businesses in India through a permanent establishment. The law makes it clear that Fils investing in India are not deemed to have a permanent establishment in India. Therefore to demand MAT from them is unlikely to succeed.
Moreover the position adopted by the government is at variance with commonly accepted international practices. Over the last 65 years international capital markets have grown dramatically and well accepted rules of the game have evolved. As European pension funds institutions and individuals invested in the US markets and then the US institutions invested in Europe all governments accepted that such investments would be tax free in the countries receiving the investments but that tax would be paid in their own countries; similarly when western institutions invested in Japan and Southeast Asia, the same rules applied. Since we have chosen to invite foreign institutional investments into India we should abide by the same rules.
Another way of looking at this would be to ask the hypothetical question as to what would have happened if the US chose to tax gains on the billions of dollars of investments in US treasuries held by the RBI.
This insistence on issuing clarifications only for the future, without applying the same logic to the demands for past years, is also bad politics. All it means is that India gets a negative image amongst international institutional investors. In any case, the final amounts collected would be very small compared to the negative publicity the country has received.
Instead of the government and its ministers facing the flak whenever interacting with foreign investors, it would make more sense for it to simply blame the previous finance ministers, Pranab Mukherjee and then P. Chidambaram, during whose tenures badly worded amendments were made to the Income Tax Act, and issue clarifications that applies ab initio. This would be a positive push to Prime Minister Narendra Modi’s intent to make India an attractive place to do business. ♦