It seems the Centre has failed to pacify the foreign institutional investors. Around two weeks ago, our Finance Minister said that the government would press ahead with Rs 40,000 crore tax demand on FIIs. "I can change the face of India's irrigation with that Rs 40,000 crore," he claimed. Earlier, the investors had approached a tribunal but the latter decided against them. "How would be I answerable to Parliament that after the case I just waived Rs 40,000 crore," the minister reacted to this. The tax shocker rattled the equity markets in no time.
After two consecutive weeks of losses, the Sensex has lost over 1800 points, wiping out its entire gains made in 2015. Nifty has slipped nearly 1 percent so far in the year 2015. During the period, the rupee has depreciated by 1.78 percent. It is true that some other factors like Q4 results and monsoon forecast are responsible for this downfall, but it is the pulling out of money by the FIIs — which own 23% of the market as on December 2014 — over fear of retrospective tax that has made the real damage.
Last Friday the Centre went into a crisis-defuse mode, saying that so far total tax demand of 602.83 crore has been raised . . . the exact demand can only be quantified after final orders. In other words, the figure of Rs 40,000 crore might be theoretical only, computed by estimating the demands from all FIIs for all the seven years since 2007-08, including treaty cases. In a similar move, the CBDT notified its officers to settle within a month all claims made under the double taxation treaties, but again the letter hardly helped the cause.
Is there anything wrong in tax authorities demanding tax dues from the FIIs? The importance of FIIs to the economy cannot be overemphasized, but right now I want to leave this question aside. What I am concerned about is the confusion over our tax policies. There is a clear lack of clarity at a conceptual level as to the application of MAT. The same was the case over GAAR a few years ago, and it was a lesson well-learnt that no amount of damage control can match no damage at all. We expect the "business-friendly" government to strain every nerve to make our tax policies transparent and predictable for investors.
I invite your opinions. |