Budget 2016: Placing checks on the I-T department

While the NDA regime has been quite vocal about proclaiming that it will not go after foreign investors, the Income Tax Department has done just that over the past year; embarrassing the Centre.

This was evident in the demands for payment of Minimum Alternate Tax (MAT) on foreign portfolio investors raised last year and in the Cairn run-in with the IT department.

But the Union Budget has tried to clear the air on these issues.

This crisis erupted after the Budget of 2015 in which the Finance Minister said that transaction of FPIs put through after April 2015 will not be subject to MAT. This appeared to suggest that transactions put through prior to that date were subject to MAT.

It has been clarified that FPIs from jurisdictions that had signed a double tax treaty with India and those who do not have a permanent establishment in India will not be liable to pay MAT.

The Budget has gone on to propose that foreign investors who are not from jurisdictions that have signed a double tax agreement with India, but those who are not required to register as a company in India are not required to pay Minimum Alternate Tax.

This means that all foreign portfolio investors are now exempt from MAT.

While Jaitley had said in the last Budget that fresh demands for tax based on retrospective tax amendment of 2012 will not be raised, the IT department slapped a huge tax demand on Cairn India and its erstwhile parent, Cairn Energy PLC in March 2015.

The demand was for failing to pay capital gains tax on profits made when the Indian assets were transferred to Cairn India.

Cairn UK Holdings was allotted shares in Cairn India in lieu of the shares of Cairn India Holdings. This ensured that Cairn Energy PLC held 69 per cent stake in Cairn India after the IPO.

The Centre has appointed an international arbitrator to hear the case

The Finance Minister has now proposed a one-time scheme of dispute resolution for cases that are currently under dispute based on the infamous retrospective tax amendment of 2012.

Subject to the companies agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc. they can close the case by just paying tax arrears. The interest and penalty shall be waived.

While this sounds lucrative, it is unlikely that companies will take up this offer as the tax demand made on them is really large. Vodafone for instance has to pay ₹14,200 crore for its acquisition of stake in Hutchinson Essar and Cairn has to pay over ₹10,000 crore as tax liability.

Setting up a high-level committee that looks in to any fresh case where the “assessing officer proposes to assess or reassess the income in respect of indirect transfers by applying the retrospective amendment,” is a good idea as it will check the arbitrary demands from the Revenue department.

This committee will now be chaired by the Revenue Secretary and consist of Chairman, CBDT and an expert from outside.

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