Talking Point. The Centre’s good-cop bad-cop act

A time-tested way to make someone accept a peace-offering is to first threaten them with dire consequences and just when they are quaking with fear, slip in the deal. The Centre is clearly trying this routine with foreign investors.

The Finance Minister consistently makes placating noises in every Budget, promising foreign investors that their tax-related struggles are almost at an end while the income tax department goes about slapping tax demands and notices, indifferent to these promises.

The news that Cairn Energy was asked to pay around ₹29,000 crore by the Indian income tax department just before the Budget only reinforces the view. The tax department had also issued a reminder to Vodafone Group Plc in February asking the company to pay ₹14,200 crore of tax dues or risk having its assets seized.

These demands were raised just ahead of the Finance Minister’s proposal of a one-time dispute resolution scheme in the Budget. Under this Direct Tax Dispute Resolution Scheme, foreign investors can settle cases based on the retrospective tax amendment of 2012, by paying only the tax arrears to the Revenue Department; with the interest and penalty waived.

Interestingly, when the initial tax notice was served to Cairn Energy PLC in 2015, the UK-based oil company was asked to pay only ₹10,247 crore, which was the tax on the capital gains made when it transferred stake in Cairn India to Vedanta in 2007. The additional ₹18,800 crore of interest is a new addition in the final assessment, probably done to make the offer made in the Budget look more appealing.

Last year too, Arun Jaitley had announced in the Budget speech of 2015 that no fresh demands based on the infamous retrospective tax amendment of 2012 would be made in future. But the IT department went on to issue a demand on both Cairn India as well as Cairn Energy in March 2015 based on this tax amendment.

It could be argued that the IT department had begun auditing the books of Cairn Energy in January 2014. But the tax demand on Cairn India and on its parent, Cairn Energy, was raised after the 2015 Budget , undermining the FM’s statement.

However, the good cop stayed true to his part in the recent instance of the demands on foreign portfolio investors (FPI) for the payment of Minimum Alternate Tax (MAT).

These demands are unlikely to be enforced and a notice has been issued stating that FPIs are not liable to pay MAT.

At a time when the capital inflows in to the country are under duress due to the ongoing global turmoil, the Centre needs to seriously re-think this strategy. Foreign investors are not fools to believe that the IT department is acting in a silo without the consent of the Centre.

Foreign portfolio flows turned negative last fiscal as rising global risk-aversion spurred foreign investors to pull money out of all emerging markets. NRI remittances have also been muted due to the slowdown in oil producing countries.

Foreign direct inflows have, however, been at record highs this fiscal with inflows of ₹191,063 crore between April and January.

It is obvious that foreign investors are drawn to the superior growth in the Indian economy. But many foreign investors have voiced concerns about the Indian IT department’s penchant to slap demands based on retrospective amendments.

The country has the potential to draw even higher flows if the Centre can display stability in its tax and other regulatory policies.

The country has received ₹64,000 crore more so far this fiscal as FDI, compared to the similar period in 2014-15. This approximately covers the major tax demands currently under dispute such as those on Vodafone, Cairn and Shell. Maybe it’s time to don just the benign and friendly face.