After initially defending the taxman’s application of a minimum alternate tax (MAT) on FIIs for previous years—the finance minister even ridiculed FIIs for asking for a retrospective application of the budget provision that no MAT will be applicable from now onwards—the finance ministry has come a long way. Stung by FIIs pulling out of India, the finance ministry first offered to allow treaty benefits to FIIs—so, Mauritius-based FIIs could, for instance, opt to pay the Mauritius tax instead of the Indian MAT. Later, a panel under Law Commission chairman AP Shah was set up to examine the MAT issue and, till its report is out, taxmen have been told to put on hold all notices already sent or in the process of being sent—that’s a far cry from the case where, for instance, Cairn India was asked to pay R3,000 crore of upfront taxes and a similar amount in sureties before its case was heard in the court. The finance ministry’s climb-down, of course, is related to the huge heft FIIs have in the market—with them pulling out of the Indian market over the last fortnight, the Sensex has collapsed. The lesson for the finance minister, though, should be that there is a larger problem with the taxman that needs to be fixed, and fast.
It is unlikely that firms like Vodafone and Cairn that have sunk in billions of dollars into India can pull out with the ease the FIIs can, but when it comes to future investment, the arbitrariness of tax demands will surely weigh on their decisions—it is hard to think of, for instance, any MNC buying the Nokia factory until the tax case is resolved. Some cases, such as the Shell and Vodafone transfer pricing ones, it is true, were resolved by the Bombay High Court, but asking investors to try their luck in a lengthy court process is a bit much. Whatever the finance minister’s political compulsions in not withdrawing the retrospective amendment, investors cannot be expected to make allowances for it; more important, how do they deal with tax cases like the transfer pricing ones that are not related to the retrospective tax? Though the finance ministry had, for instance, introduced a roll-back provision in advance pricing agreements to allow the taxman to resolve old cases of transfer pricing adjustments, little progress has been made in these cases. In which case, it would be a good idea to bring more cases to the AP Shah panel since it is clear the existing dispute resolution methods aren’t really working.