Corridors of Power: FM Jaitley finally getting his act together

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September 28, 2015 12:19 AM

If he succeeds in cleaning up the retrospective tax mess, it will be a big boost for the Modi dispensation, reeling under Parliamentary setbacks on the Land Acquisition and GST Bills

The way Arun Jaitley is showing proactiveness now in solving the tax cases, the revenue department’s appeal in the Sanofi case may just be a matter of routine handling of the cases pursued by the income tax department. (PTI)The way Arun Jaitley is showing proactiveness now in solving the tax cases, the revenue department’s appeal in the Sanofi case may just be a matter of routine handling of the cases pursued by the income tax department. (PTI)

Whether Prime Minister Narendra Modi has put his foot down or finance minister Arun Jaitley himself has realised that he has no other option than to act fast now, there is a distinctly visible urgency in the air in solving the pending tax disputes since the government accepted the AP Shah panel’s recommendation that the minimum alternate tax (MAT) should not be imposed on foreign institutional investors (FIIs) prior to April 1, 2015.

While the decision puts to rest the controversy which saw Jaitley first taking a tough stance and then after a reaction in the stock market softening it and handing over the issue to the Shah panel for resolution, it has also raised expectations about the government taking a similar view on other retrospective tax cases which came up during the UPA regime, and which the NDA government calls legacy cases.

Justice Shah, in an interview to The Financial Express, did point out that in his interaction with the government he found there is a clear sign of eagerness to clear the tax mess. So, it is not surprising—though this should have been done earlier—that Jaitley has now promised that the high-profile legacy cases will be put to sleep over the next 2-3 months.

The move on Thursday to provide relief to foreign companies with no ‘place of doing business’ in India from the 18.5% MAT irrespective of whether they are from a country with a tax treaty with India or not, is the logical follow-up to the MAT-FII decision. While this step is a minor clarification, Mauritius-based Castleton Investments fighting the tax notice in the Supreme Court currently has already got relief with the government recently making it clear that the entities covered by the tax treaties would get the benefit of the treaty provisions. In this case, Castleton’s income from India would be subject to capital gains tax in Mauritius, where it is zero rated.

In fact, Shah panel’s suggestion in the case of the FIIs laid the roadmap for these decisions. It said that since foreign portfolio investors (FPIs) not having a place of business or PE in India do not prepare books of accounts in India as per the Companies Act, MAT liability cannot be attributed to them. With the road to resolving these cases now cleared—the changes in the Income Tax Act are to be affected in the winter session of Parliament—Jaitley’s next stop logically has to be the high-profile retrospective legacy tax cases, including Vodafone and Cairn.

Here too, though Jaitley had the opportunity to utilise the judgment of the Andhra Pradesh High Court in the Sanofi case to tackle retrospective tax cases—which he has missed by allowing the income tax department to appeal against the judgment in the Supreme Court—he can still go ahead and decide not to pursue the case in the apex court further. After all, the Castleton case is also in the Supreme Court, but the Shah panel’s MAT-FII report has almost ensured that it is a dead one.

The way Jaitley is showing proactiveness now in solving the tax cases, the revenue department’s appeal in the Sanofi case may just be a matter of routine handling of the cases pursued by the income tax department, because in case it is not, then the finance minister’s assurance of putting to sleep 2-3 high profile legacy tax cases over the next 2-3 months is on a very shaky ground.

As a matter of principle, this is another big case besides Cairn and Vodafone which falls under the category of retrospective (legacy) tax cases—the Supreme Court on Tuesday admitted the income tax department’s appeal to recover R1,058 crore in taxes from France’s Sanofi for its 2009 purchase of Hyderabad-based Shantha Biotechnics.

The Andhra Pradesh High Court gave a ruling in favour of Sanofi Pasteur Holding SA in February 2013, saying the case was similar to Vodafone’s $2.2-billion tax dispute in which the Supreme Court in 2012 had dismissed the tax demand over the British firm’s acquisition of 67% stake in Hutch-Essar in 2007. The judgment is critical as it came after the retrospective tax had been brought on the statute and it also upheld the supremacy of the tax treaty provisions. In effect, the ruling means that the retrospective amendment to supersede the verdict in the Vodafone case related to the taxation of offshore transfers does not impact the provisions of the India-France DTAA because the DTAA overrides the Income Tax Act.


Taking a cue from the Cabinet decision of not appealing against Bombay High Court’s judgments in the Vodafone and Shell transfer pricing cases in the Supreme Court, the government had the option of stopping the income tax department from appealing against the Andhra Pradesh High Court decision in the Sanofi case in the Supreme Court. But as this route has not been taken—it is also a fact that the Sanofi case appears to be a weak one—the finance minister must now focus on the whole gamut of retrospective amendment and the tax cases associated with it, and refer the matter to the Shah panel quickly for suggesting ways to deal with these cases.

A favourable recommendation from the committee would lay the foundation for doing what Jaitley has indicated. Though he has not mentioned which are those 2-3 high profile cases that he wants to get rid of in the next 2-3 months, it is clear that he is talking about the big retrospective tax cases, as without solving Vodafone and Cairn disputes, he can’t claim to have cleared the tax mess.

The handling of these two high-profile cases by the NDA government has been confusing until now. While the finance minister has clarified on a number of occasions that no fresh cases will be taken up under the retrospective tax amendments of 2012, the arbitration processes in these two cases are stuck—though the government has appointed its arbitrator in the Vodafone case, even this has not been done in the Cairn case.

If the finance minister succeeds in resolving these cases with the help of the Shah panel and cleans up the retrospective tax mess in the next few months, this will be one of the biggest achievements of the Modi dispensation.

There are more reasons to believe that Jaitley is all set to do it than to think that what he has assured is just a statement aimed at the foreign investors, and not to be taken seriously.

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