IT’s overreach

Foreign Portfolio Investors have reason to cry foul over the income tax department’s demand for Minimum Alternate Tax on capital gains made in previous assessment years. They have been trading in the country’s equity market since the early 90s, secure in the belief that they are not liable to pay capital gains tax as they come from jurisdictions that have signed double tax avoidance agreements (DTAA) with India. Given that they were suddenly slapped with tax demands last December, it is hardly surprising that motives have been questioned and charges of tax terrorism levelled. Demands for the payment of MAT were based on the ruling of the Authority of Advance Rulings (AAR) in the case of Castleton Investments Ltd in 2012, which held that foreign investors were liable for MAT. But strictly speaking, AAR rulings are binding only on the entity they apply to and for the transaction under dispute. The IT department has been overzealous in applying this ruling to all FPIs in India. These are made up mainly of foreign investors from countries that have DTAAs with India, under which capital gains is payable only in the country where a company is resident or registered. Section 90 of the Income Tax Act has a clear provision of relief from double taxation in cases where tax is applicable in a country which India has DTAAs with. Irrespective of what the AAR has held, the IT department’s actions seem to undermine the principle that an international agreement supersedes a domestic tax law, however interpreted.

Finance Minister Arun Jaitley appears to have realised the folly of such demands, reflected in his clarification in the Finance Bill, 2015, that MAT will not be charged on capital gains of FPIs from April 2015. But this clarification has only roiled the issue further; as the argument goes, doesn’t stating that MAT on capital gains cannot be charged prospectively imply that it was taxable in previous years? The Centre’s position on this issue, which is to remain aloof until this matter is decided by a court of law, is not a bad one. It has resisted pressure to withdraw the tax demand while at the same time signalling clearly that India is not a shadowy tax haven.

As for the FPIs, they should seek redressal at the appropriate judicial forum rather than make covert allegations of tax terrorism and empty threats to pull out of the equity market. Many foreign investors — pension funds, mutual funds and banks — are here for the long term and would prefer to stay invested due to the relatively superior prospects of Indian companies. Again, given the high impact cost in the Indian market, a large-scale exodus will only decrease the value of their portfolios and affect profitability. So while the FPI bluff should be called, their views demand a patient hearing.

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