Nearly five months after Finance Minister Arun Jaitley spooked the India stock market by declaring that the Government was set to retrospectively impose Minimum Alternate Tax (MAT) on capital gains made by Financial Institutional Investors (FIIs), a committee appointed by the Government has opposed the measure.
The suggestion of the justice AP Shah Committee, submitted to Jaitley on July 24, will come as a big relief to foreign investors who had slammed the government for going back on its commitment that it will not impose any retrospective tax in view of the confusion created by the famous Vodafone case.
Sources said the Shah panel has told the government that imposing the MAT retrospectively will not be legally tenable since there was no basis for it. The panel’s recommendation is likely to be accepted up by the government, which set up the Shah committee ostensibly to give it a face saver to rescind its controversial decision.
The dust may settle on the controversy and FIIs can investment in the market with greater deal of confidence, but the facts remains that Jaitley’s indiscretion cost the investor an estimated Rs 2 lakh cr because of capital erosion due to market crash.
Incidentally, Jaitley first pegged the outstanding MAT due to around Rs 50,000 cr and then his own government revised it to less than ₹1000 crores ($152.17 million). The MAT case shows how “loose” comments by senior government ministers on sensitive issues like this could badly hamper investor sentiments.
After the Income tax department on April 20 sent notices to 68 foreign institutional investors demanding ₹602.83 crores ($91.73 million) as MAT dues of precious years, several FIIs challenged the order in courts contending that MAT was applicable only to India-based domestic companies. The FIIs also pointed out that since they were never asked to pay MAT in the past, they were unprepared for such retrospective measure.
The end of the MAT confusion will send the right signal to the FIIs at a time when they were pulling out of the Indian market in a big way due to a host of external factors.
In accepting Shah panel decision, Jaitley will have to eat his own words. On April 7, addressing a conference organized by Confederation of Indian Industry, Jaitley said India will not allowed to tax haven.
“An emerging economy (like India) that expects investment cannot really indulge in tax terrorism or aggressive tax policy. But our fairness is partly misunderstood. The converse of tax terrorism is not (being a) tax haven.”
– Arun Jaitley, Finance Minister
Four months down the line, Jaitley is set to make a big climb down by giving the MAT issue a decent burial.
1. The conversion rate used is 1 US Dollar = 65.70 rupees.
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