The controversy erupted when the tax department served notices on 68 foreign institutional investors (FII), demanding MAT dues. The notices were served after the Authority for Advance Rulings in 2012 had directed Mauritius-based investor Castleton to pay MAT on its book profits when the company transferred shares from a Mauritius entity to one in Singapore. What was surprising was that so much uncertainty over investments by FIIs was created even though the total value of the tax notices served eventually was just Rs 602 crore. The government got a committee headed by Law Commission Chairman A. P. Shah to look into this; but its report, submitted in July, was not made public because the Supreme Court was to hear a case that has a bearing on the matter filed by Castleton. As a result, uncertainty just increased. It is welcome that the government tried to make its intentions clear last week – especially as risk concerns return to global markets.
There is a lesson from all this. The government must douse such fires more swiftly. The tax department, meanwhile must be reined in. An overzealous pursuit of such cases is counterproductive to the larger cause of tax administration. It adds to the overall perception that India is arbitrary about taxes. The water has already been muddied by innumerable previous instances of conflict, notably those involving Vodafone and Cairn. In the MAT -FPI case, innumerable foreign investors had already got their prior tax returns audited by the tax department – without MAT ever being asserted. Investors have acquired and sold shares based upon share prices reflecting the understanding that the funds had no Indian tax exposure for portfolio securities sold after being held for the requisite long-term holding period. The harm to investor confidence – harm that is directly attributable to the sudden and unexpected MAT assertions – cannot be overstated.
(Source: Editorial in the Business Standard dated 24-08-2015)