The Janus face of tax laws

Finance Minister Arun Jaitley did not mince his words while defending the minimum alternate tax (MAT) controversy in March 2015, when foreign institutional investors criticised the government for levying retrospective tax . In a strongly-worded message Jaitley had declared that India was no tax haven . "Let it be clearly understood that India is not so vulnerable that every legitimate tax demand can be considered as tax terrorism. We are not a tax haven and we don't intend to be one," he had said.

Foreign portfolio investors (FPI), however, did not take kindly to the FM's words. Between March and April, the National Stock Exchange (NSE) Nifty fell around 9 per cent from 9,000 to the 8,100 level. And, this has not gone unnoticed.

In September, the government clarified that MAT will not be applicable to foreign companies that do not have a permanent establishment or place of business in India. The law has been amended with effect from April 1, 2001. It effectively means that retrospective taxation in case of FPIs is passe.

HITS

• Deferment of general anti-avoidance rule (GAAR)
• Not pursuing the Vodafone transfer pricing case in Supreme Court
• Allowing rollback facility under the advance pricing agreement
  

MISSES

• Sending wrong signal in the MAT issue on FPIs
• Coming out with a hurriedly drafted Black Money Act 
  
• Introducing the concept of place of effective management, which is contentious 
  
• Lacking conviction in dealing with ongoing tax litigations

The move brings forth the Centre's blow-hot-blow-cold attitude when it comes to tax issues. The NDA government had come to power with the promise of eliminating tax terrorism. It subsequently deferred the general anti-avoidance rule (GAAR) and desisted from pursuing the Vodafone transfer-pricing case. But, since then, some of North Block's actions have sent the wrong signals - be it the handling of the MAT issue or the 'hurriedly' drafted Black Money Act.

Tax experts and industry players are of the opinion that the Centre has not come good when it comes to implementation, in spite of all the right noises it had made initially. Says Milind Kothari, Managing Partner and Head, direct Tax, BDO India LLP: "The reversal of stand within six months reminds us of the Vodafone and Shell Premium controversies, where the government pursued the wrong cases and was ultimately defeated in court. This has harmed the credibility of the country."

Others say that the MAT issue could have been dealt in a different way. "Instead of going for an amendment in the finance bill and making an amendment that was prospective in nature and, by default, meant that earlier cases would come under the MAT ambit, the government could have just issued a circular. It is easier to recall a circular than undoing an amendment," says Sunil Jain, Partner, J. Sagar Associates.

The stringent Black Money law is also turning out to be a futile exercise to justify the NDA's pre-election rhetoric of bringing back black money stashed abroad. The government has barely managed to get disclosures worth Rs 3,770 crore during the limited window period ending on 30 September under the Act. The government, however, looks to be in no mood to extend the deadline of the disclosure window.

"We have no credible estimation of black money lying abroad, though different agencies have come up with their estimates and have even retracted them. In such a scenario, the whole exercise seems like shooting in the dark," says a former Indian revenue service officer. Agrees Jain: "I fundamentally have no issue with the Act. But the only area of importance will be implementation. Once the limited window is over, will the government be able to chase and catch the big fishes and garner the kind of tax revenue as they had promised?"

Multi-national and foreign companies are also wary of a new clause in the tax law, which says that if a company has a place of effective management (POEM) in India, at any time of a financial year, it would make it a tax resident and will be liable to relevant pay taxes here for the fiscal.

"It could effectively mean that if a foreign company holds a board meeting in India just once and takes some policy decisions, it would make the company a tax resident. We have made representations before the CBDT (Central Board of Direct Tax) and have pointed out that the word 'any time' should be replaced by 'during a year'. The chairman and other officials even admitted to the anomaly and promised to correct the law, but six months have passed since then and no clarification has come from the (tax) department yet," says Amit Maheshwari, Managing Partner, Ashok Maheshwary & Associates, a chartered accountancy firm.

The NDA government's decision to bring amendments in tax laws related to transfer pricing cases, but letting the court decide the fate of the ongoing cases, also came under criticism. "Such a stand was unfair. For the same issue one company is being exempted while others are fighting cases," says Ved Jain, Chairman, Direct Tax Committee, ASSOCHAM.

Says Kothari: "In fact, globally, transfer pricing is not a tax revenue-generation mechanism, it's a tax avoidance law. Only in India tax officers get revenue target on transfer pricing." Jain agrees and feels the government is being pennywise and pound foolish.

But then, what happens to the Centre's promise of a non-adversarial tax regime? Says Deepak Jain, Associate Vice President, Legal, Srei Infrastructure Finance: "The tax officers get revenue targets and targets for the number of tax demands. Their promotion depends on meeting these targets. In such a situation, how can you expect them to go soft?" The disconnect between the government's vision and actions of tax officers is consistent with the Centre's inconsistencies.