The Central Board of Direct Taxes (CBDT) may have thought it wise not to intervene in the Cairn Energy Plc tax case on the grounds that it was an existing case, but its policy of applying MAT on FIIs is quite worrying. More so since FIIs, as an investment group, remain very bullish on India even as other groups remain a bit sceptical and are waiting to see some more evidence of progress on the ground. The issue of whether MAT can be applied on FIIs is not a new one, which is why finance minister Arun Jaitley, in his Budget speech, sought to clarify saying that this levy would not be applicable. The problem, however, is how the existing tax demands for the earlier years are to be dealt with. There is no clear estimate of how much the amounts involved add up to, but it is safe to say that, were MAT to be levied for one year, it is difficult not to go back and charge it for the past period as well—in which case, the actual amount will be much larger. In such a situation, you would imagine the CBDT would have issued guidelines to field officers asking them to withdraw the notices—presumably, it has done nothing of the sort since the notices have not been withdrawn. Given how, in the case of Advance Pricing Agreements between the taxman and companies—to agree on tax treatment—the government has come out with the rollback guidelines that allow the same rules to be used for previous assessments as well, it would be easy for the CBDT to apply the same principle here.
Apart from the fact that it is illogical to be applying taxes on FIIs for the past while the Budget explicitly rules this out, there is the issue of whether the taxman can even win this case. Its track record of winning cases, it is well known, is quite poor. And in this case, there is the issue of whether the FPIs even have a permanent establishment in India—if they don’t, they are not required to keep their books here and they cannot be taxed as per the double tax avoidance treaties. Indeed, there are several rulings on whether MAT can be imposed on foreign entities and there is also a case pending in the Supreme Court on the issue. All of which makes a compelling case for the CBDT to step in and issue the necessary orders to field officers. For one, there is the issue of the size of the FII flows and their role in keeping the stock market where it is—FIIs own 23% of the market and 47% of the free float (as on December 2014). And, apart from the issue of whether the case can even be won, there is the issue of what signals this sends out to investors.