Finance minister Arun Jaitley has done well to say that the expert panel under Law Commission chief AP Shah will examine legacy tax issues, not just the one on MAT on FPIs. While the government has tried its best to sort out some of the legacy issues, by not challenging the Bombay High Court verdict on the Vodafone and Shell transfer pricing cases, there are too many legacy cases for investors to keep trying their luck at the courts—arbitration is not much easier since, as in the case of the Vodafone dispute, the process has not even started; in other cases, such as Cairn Energy Plc which wants to go for arbitration, the government is arguing that tax matters cannot come under the ambit of bilateral investment treaties. In many cases, such as the Vodafone and Shell ones, it was found the taxman was looking at only a partial picture. In both cases, the companies had argued they were just bringing in foreign investment, so where was there any question of applying transfer pricing adjustments? Similarly, in the case of Cairn, the company has argued no tax is leviable since it was merely doing an internal reorganisation of assets—assets held overseas were transferred to an Indian company which then went in for an IPO.
In all such cases, a more holistic look is required instead of a purely technical one. Many transfer pricing cases, for instance, are stuck on what level of profits should be taken to be appropriate by the taxman. If the three-member Shah panel constituted on Wednesday is able to take quick decisions on various cases, and the government accepts its recommendations, chances are this will go a long way in resolving legacy issues. Even if the panel recommends tax payments, firms will have a better shot at arriving at a negotiated settlement than under the existing dispute resolution systems. It is good that the panel will first tackle the issue of MAT on FPIs, and then take up other matters referred to it.