Given the number of representations made by panicky FII investors, it is not surprising the finance ministry has decided to put on hold the taxman’s December 21 circular.
Given the number of representations made by panicky FII investors, it is not surprising the finance ministry has decided to put on hold the taxman’s December 21 circular. What is shocking, though, is the lack of oversight that allowed such a major tax move to be made through a ‘clarification’ and how, till the FIIs protested, no one in either the tax department or the ministry even realised the implications of the circular. The origin of the Section 9(1) circular, it is well known, is the Vodafone case where Hutch sold its Indian telecom operations but didn’t pay taxes since the assets were held through a firm listed overseas—this was to be plugged by the new notification which said that, as long as the underlying asset was mostly in India, a tax would have to be paid even if the listed entity was overseas. It was always obvious this could not apply to FIIs who, in any case, pay all taxes applicable in the country, whether by way of the securities transaction tax (STT) or through capital gains taxes. Despite this, the taxman issued a ‘clarification’ that brought in FIIs into the tax net twice over—so, even as the FII entity paid taxes on its investments in India, individual investors overseas were to be taxed again when they exited the FII fund. Who came up with such a bizarre tax and didn’t anyone senior in the tax hierarchy or the finance ministry even see it or examine its ramifications?
If this was the first time such a mishap took place, it would be one thing. But FIIs would remember how, last year, after the taxman started levying MAT on them, finance minister Arun Jaitley first defended the action—he said the money would come handy in adding to irrigation facilities in the country—and only later agreed to withdraw the tax notices. Once again, it would appear, no one examined the implications of the tax before briefing the finance minister. Indeed, given how the prime minister is so keen to encourage start-ups, the taxman’s decision to start taxing start-ups on capital they have received seems another case of little application of mind—since under Section 56(2)(viib), the taxman can treat any payment above ‘fair value’ as an income, the taxman is arguing high valuations received by start-ups are income; in this case, the finance ministry is yet to withdraw the tax notices.
While the government would do well to institute a system where top-level officials regularly review the impact of various tax orders/notices, investors can’t be blamed for feeling the investment climate is getting increasingly uncertain. If the demonetisation took them by surprise, the prime minister added to this by talking of how “those who profit from financial markets must make a fair contribution to nation-building through taxes”. While the finance minister was quick to say this was misinterpretation by the media, since the prime minister’s website and tweets made it clear there was no added-in-translation, investors are now waiting to see whether the Budget will tax them more. Levying arbitrary taxes, or threatening to do so, isn’t the best way to attract investors.