With the government accepting the recommendations of the Justice AP Shah panel on the inapplicability of minimum alternate tax (MAT) on FIIs prior to April 1, 2015, there is heightened expectation now that it will have a similar approach towards handling other controversial tax issues, including retrospective tax amendments. Justice Shah, in an extensive conversation with Santosh Tiwari and Gireesh Chandra Prasad, said that the government appears to be serious now to put in place a stable and predictable tax regime in the country. Excerpts:
Do you think the government delayed in taking a decision on the applicability of MAT on FIIs?
The controversy erupted in December last year. After the notices were sent, the committee was appointed in May and it gave its report in July. After deliberations with the CBDT, a revised report was submitted to the government. So, I don’t think there has been a delay on the part of the government in taking action.
The CBDT erred by sending notices to FIIs basing its action on Authority for Advance Rulings (AAR) judgment in the Castleton case. Isn’t it?
The Castleton case was some sort of a dilemma for the department. In this case, the authority held that the earlier judgment in Timken and Praxair were incorrect. So, the Castleton judgment was the only one which remained in the field. This judgment interpreted that all foreign companies, whether they had a permanent establishment (PE) or a place of business in India or not, were liable to pay MAT. An appeal was filed against this judgment, which remained pending for a long time. By that time, the department’s claims started getting time-barred, so it started issuing notices to FIIs. Although the Castleton case was not about FIIs, it was about a foreign company which didn’t have PE or a place of business in India and the company relied on the earlier judgments, Timken and Praxair. The department also accepted those judgments, but AAR took a different view. The diametrically opposite views of the authority led to this problem and issuing of notices to FIIs.
The Castleton case is in the Supreme Court now. You have cleared FIIs’ part. What about companies?
The reference made to the committee was about the applicability of MAT on FIIs prior to April 1, 2015. We found that a foreign company which is not governed by the regulatory regime of the Companies Act would not be covered. Companies Act provisions would apply to a company which has a place of business in India. Since FIIs do not have a place of business in India, the Companies Act is not attracted to them and they do not need to submit accounts as per the Act, and MAT cannot be applied on them. The other reason why we said that MAT was not applicable to FIIs is that there is a separate tax regime for them with different tax rates for different types of transactions, and the application of MAT will be contrary to this.
Will the Castleton case be weak now in view of your report and the government action on it?
It is not a question of weakening of the case. In view of the fact that the government has accepted this report, it would mean that a foreign company which is not having a PE or a place of business in India will not be liable to pay MAT here. If Castleton is a company having no PE or having no place of business, that’s the end of the matter—Castleton would not be liable. I don’t think much would survive in the case now because the government has accepted the report. They (Castleton) claim that they don’t have a PE or a place of business in India.
The government has made its intentions clear to refer all legacy tax issues to your panel. Do you think it will refer retrospective tax demands and also Vodafone and Cairn cases to the panel so that by the next budget it could resolve all legacy tax cases?
The committee’s terms of reference cover legacy issues. It has a term of one year and it is likely that some other issues may be referred to it, including the retrospective taxation matter. When such issues come before the committee, we will listen to all the stakeholders and give a report to the government. We have said in our first report that India should move towards certainty in tax regime. Inconsistent judgments and positions taken by the tax department create fear in the minds of investors. It is, therefore, necessary for the tax regime to be certain and consistent.
Fortunately, the current government is keen to bring these reforms in tax laws, and I can see its commitment. Immediately after the controversy erupted, it set up the committee, and no sooner the report was submitted, it was accepted. The government’s intention is to move towards an objective, certain and predictable tax regime.
The uncertainty created by the retrospective tax demand on companies such as Vodafone still continues. How do you look at that scenario?
Unfortunately, even the MAT controversy was seen as an attempt to levy tax retrospectively. It is not a retrospective tax demand. It is really reopening of the assessments. But the outside world perceived it as another attempt at levying tax retrospectively. This is an important issue but I do not wish to make a comment. The government may decide to refer it to the committee in the future. If it comes, the committee will review the matter and give a report.
Income tax arrears are more than the direct tax collection target for the current financial year despite the income tax department’s record in winning cases. Then, you have Rs 2.64 lakh crore of transfer pricing adjustments since FY06. Don’t you think a change in this attitude is necessary?
It is true that there are complaints about unjustified tax notices or the large list of pending litigation. That is a matter I cannot comment on. But by accepting the committee’s recommendation on the FPI-MAT issue, the government has avoided huge litigation. Even these cases could have dragged on for a long time and nobody can predict the outcome. I think, gradually, these issues would be resolved.
In the FPI-MAT issue, where did you see the real problem—at the level of field officers or at the top brass of the tax administration?
In this issue at least, I found the problem was with inconsistent judgments of AAR, and not with field officers. Of course, field officers did add to the confusion by saying that FIIs conducting the business here itself constituted a place of business in India. We rejected that position. Conflicting judgments create confusion which are best avoided.
Do you think it was appropriate for the government to decide to amend the law in favour of the taxpayer when the dispute was still pending before the Supreme Court, notwithstanding the fact that it was the court’s domain to interpret the law?
If the government had waited, it would have been blamed for delay, and there was little guarantee that the government would get the desired result at the apex court. There were AAR rulings as well as the committee’s report before the government and it took a decision. This is the appropriate thing to have done. All issues cannot be left for the courts to decide. The government has to be proactive in tax matters. Investors were very worried about the inconsistency in taxation. FIIs are structured in a typical way. Investors come and go. When tax demands are raised years after some investors have left, who will bear that tax liability? If taxation is predictable, they can decide with certainty whether to invest or not. The government is right in taking a proactive step in granting relief to FIIs by going for a simple clarificatory amendment in the law.
The relief granted from MAT on trading gains is limited to FPIs. What about trading gains of companies?
If the company has a branch or a place of business in India to do regular business, then I think that company may be liable to pay MAT. That is the taxation scheme all around the world. There is nothing wrong in India taking the same position. I think the CBDT is happy with this position as they have been taxing foreign companies with a permanent establishment in India, which they would not like to upset.
What if any third-party approaches the Supreme Court on the FPI-MAT issue as in the case of the Azadi Bachao Andolan where the government’s circulars on India-Mauritius tax treaty were challenged?
You cannot stop people from filing public interest litigation. The Azadi Bachao Andolan case is one example of a high court striking down the circular related to the treaty but finally the Supreme Court upheld it. Ultimately, matters of taxation—whom to tax and whom not to tax—rest with the government, unless a decision in these matters, per se, is mala fide. I don’t think there is any cause for attributing any motive to the government.
Do you think the government decided to give relief to FPIs only because the tax demand involved was just Rs 603 crore?
I really do not know. My perception is that the government wants to send the right signals to investors and tell them that the legacy issues will be taken care of and that there would be certainty in taxation. An investor doesn’t mind paying more taxes, but wants certainty with respect to taxation.