After holding out for a few months and allowing an escalation of the row with foreign investors on tax demands prior to April 1, 2015, the Narendra Modi government has finally settled the issue. It has said that it will withdraw the cases of Minimum Alternate Tax, or MAT, on capital gains raised on foreign institutional investors before the start of this fiscal year. The recommendations of a committee headed by Law Commission Chairman A.P. Shah have come in handy for the government to address what had turned out to be an increasingly unseemly row between overseas investors and the Indian tax administration, with the latter seen to be adopting an arbitrary approach.
Finance Minister Arun Jaitley has also indicated that the amended Income Tax Act would be more transparent — a demand high on the wishlist of investors, both foreign and domestic. While this assurance is welcome, it has come late — months after the MAT row on top of the Vodafone tax issue had put off many foreign funds keen on increasing their exposure to one of the most attractive investment destinations in the world. This episode underlines a worrying trend over the last several years of a tax policy unit disconnected from its administration, especially its field formations or tax officials on the ground. Such perceived arbitrariness on the part of India’s taxmen may well have been par for the course, but not when the country is running a current account deficit and needs foreign funds to bridge its investment gap. At such a time, the government should grant privileged tax or fiscal treatment to foreign investors, many of whom have enough options to choose from in terms of destinations.
The current economic backdrop offers a unique opportunity for India and its policymakers to consolidate some of the gains, including on lower commodity prices and inflation, and move on a more predictable path. That would mean, as the Shah Committee also recommended, ensuring certainty, clarity and predictability in the tax regime — a demand often voiced by investors in India and abroad. It would also help if the government were to fulfil a promise made by a top revenue department official on dealing with the “bad elements” in the income tax department.
The move to backpedal on the MAT demands comes after wasted months of expending political capital on some legislation, and follows recent efforts to clean up the mess in the banking sector. At this moment, what poses the biggest danger is the cavalier attitude on display, often by the political establishment, of taking growth for granted. That’s a mistake the previous government committed during the heady days of foreign capital flows. It is one India cannot afford to repeat.
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