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India: Tax Hell Or Tax H(e)aven?

Published on Tue, May 12,2015 | 10:07, Updated at Tue, May 12 at 10:07Source : 

By: Arun Giri, Co-founder & Group Editor, Taxsutra

The buzz words these days if you are an Indian tax professional or following the space, are: tax terrorism, tax -tortion, ‘legacy’ issues and the latest addition to this list is a phrase coined by a highly respected Senior Advocate Arvind Datar – ‘tax hell.’  In a blistering opinion piece in the Indian Express a fortnight ago ( ), Mr. Datar took the tax department to the cleaners on the MAT-FII controversy.  Mr. Datar says “what has made India a tax hell is outrageous tax demands, which have made this country a laughing stock in international tax circles.” He then launches into the tax department.. “ The latest demand of more than Rs 40,000 crore from the FIIs is seriously flawed and will have disastrous consequences. These demands will certainly get embroiled in litigation for years, with negligible tax collection. Once again, our tax department will admirably succeed in repelling foreign investment and making India as unattractive as possible. “

Mr. Datar is not only a fine advocate but also one of the most respected voices in tax circles and therefore before writing this, I thought it best to reflect over what he has said. It is my opinion, with due deference to Mr. Datar, that he couldn’t be more wrong in his assessment. What he is asking the tax officers to do is to ignore the AAR ruling in favour of Revenue in the case of Castleton and cherry pick rulings that support the taxpayer and conclude the assessments without any additions.  Essentially Mr. Datar makes an extremely vital point without actually saying it in as many words -.i.e. Make India a tax haven for foreign investors because the country needs FDI badly and therefore even if there is a tax ruling that favours the Revenue, it should be ignored. Period.  

I spoke to a senior, well respected corporate tax director of a big Indian MNC to get his take on this controversy.  He told me in one line – “ If you look at the provisions carefully, there is a ‘technical’ liability on FIIs to pay the tax. “  The operative words here – ‘technical’ and ‘liability.’ On top of it the AAR has accepted the contention of Revenue. Then how does one expect an IRS officer to not pursue the matter to its logical conclusion? The Supreme Court tomorrow may very well strike down the demand, but that doesn’t take away from the fundamental point here – that the issue is ‘arguable’ and ‘debatable.’  The second point that the very same Corporate tax director made, is even more significant – he told me bluntly that the Government, while trying to project a friendly face to FIIs, is actually discriminating against Indian companies. He gave the example of the amendments to the Finance Bill, 2015 wherein capital gains arising from transfer of securities, interest income, royalty and FTS accruing or arising to foreign company have been excluded from chargeability of MAT if tax payable on such income is less than 18.5%; that sure would have brought a big smile to the faces of FIIs and left Indian companies with a sinking feeling that this is not cricket!  

The moment this controversy broke out and it was splashed on front pages of newspapers here in India as well as abroad, the Minister of State for Finance Mr. Jayant Sinha held a conference call with FIIs ( where he was joined by Revenue Secretary and CBDT Chairperson) to assuage them. I have nothing against doing a conference call but a question does come to one’s mind – are Indian corporates accorded the same courtesy when they face tax issues?  There is a larger message that is now beginning to go out and which is quite dangerous for any government, more so when it happens to be the world’s largest democracy – Will India’s tax policy be held hostage by foreign investors? Will stock market movements determine whether FIIs get tax relief?  To be seen as pandering to foreign investors might appear to be a good commercial decision in the short run, but it also exposes us in the long run to the risk of a gun being pointed at the Government’s head every time a tax demand is raised even in the ordinary course of assessment.  

A senior IRS officer recently at a conference offered interesting information. He said that an MNC group had repatriated $5bn from India over the years, without even as much as a Sec. 15 certificate from a Chartered Accountant. When Mr. Datar talks of the so called tax terrorism/tax hell, he omits to mention what is happening around us in other jurisdictions. I happened to attend an international conference last month in Singapore and was quite surprised to learn that Australia, Indonesia and Korea are being just as tough, if not tougher on MNCs when it comes to tax levy ( ).  

Infact the Australian Tax Office (ATO) is carrying out extensive audit activity on MNCs vide its International Structuring and Profit Shifting (ISAPS ) program. As part of this program, the ATO has placed the 69 largest companies in Australia under "24/7" review and there are currently 100 issues in dispute with these companies. Yes, 100! Does that make Australia a ‘tax hell’?  Britain recently legislated the highly controversial Diverted Profits Tax, famously known as the ‘Google’ tax to target MNCs artificially shifting their profits abroad. Despite the uproar from the corporate lobby and tax consultants, David Cameron’s Government stuck to its guns and the legislation is now in force from April 1. So is UK a tax terrorist? To round it off, China has recently released a circular strengthening its scrutiny of indirect transfers like the Vodafone-Hutch deal. But what did we do? GAAR, on the back of relentless pressure from the foreign investors lobby, has been further deferred by two years.   

Now that India is a key player in the BEPS project, can we be seen to be wobbly on such critical tax policy issues? The government needs to decide if it is going to allow the foreign investors to dictate India’s tax policy. A seat at the table? Yes.. most welcome. But influencing the tax policy of a sovereign nation? I’m not so sure. Prof. Vaidyanathan (IIM-Bangalore) nailed this point in an article exactly two years ago ( ). Armed by statistics on savings & investment, he then forcefully argued “evidence suggests that our growth is due to our domestic savings, particularly household savings. Our savings rate two years ago was around 34/36 percent of GDP and more than 70 percent of this was household saving. FII and FDI inflows were always less than 10 percent of our investments.”

Coming back to the ‘MAT on FIIs’ controversy, it has all the trappings of another famous, unforgettable tax case – Vodafone.  Foreign investors, a controversial tax levy and ofcourse when these ingredients are present, arguably India’s best lawyer has to be at the scene – Harish Salve.  As in the case of Vodafone, the media has already pre-judged the case.. that the tax department is indeed a tax terrorist and the foreign press too is milking the issue. An atmosphere is being sought to be created that the demands are frivolous and that the Revenue has no case. Never mind that the much talked about Rs. 40,000 crores tax demand has now suddenly been whittled down to 1/10 of it at most.    

But here’s where it gets into an unpredictable zone - in all probability the Revenue case will be argued by the Attorney General of India, Mukul Rohatgi. He is no pushover and has gone head to head with Mr. Salve in the past and often successfully. More on that in a separate piece… but there is a catch – Mr. Jaitley has on more than one occasion termed this entire controversy as a ‘legacy’ issue. Even in Parliament, while replying to the debate on Finance Bill, he stated that the issue ought to have been resolved 3 years back when it first surfaced. One is not sure what exactly is the Government’s position – does it think that the levy is justified or otherwise? The current stance of the Government is neither here nor there.. “ let the Courts decide “ is not a position that can pass muster when the Attorney General, the highest law officer of the country, is representing the Revenue in the matter. If the Government itself is unsure of the tax demand, then all it serves to do is to demoralize its own law officers and above all – the IRS officers. A demoralized army means the battle is lost before even the first swords are raised. And what is the message for the AAR, headed by a  retired Supreme Court Judge and one of the troika of measures to introduce certainty for foreign investors alongside the APA and Safe Harbor rules.

The Government’s stand reminds me of my favourite mythological character – Karna in Mahabharata. On the most crucial day of the Kurukshetra war ( Day 17 ), Karna and his biggest nemesis Arjuna were to come face to face in a duel of death.. Duryodhana knew that Arjuna would have the edge since his chariot was being driven by none other than Lord Krishna himself. Hence he pleaded with the King of Madra – Shalya, to become the charioteer of Karna’s chariot. The King predictably was outraged but finally relented. However when he sat behind the wheels of the chariot and Karna and Arjuna came face to face, King Shalya started to praise Arjuna’s prowess in a bid to demoralize Karna. As fate would have it, Karna’s chariot got stuck and King Shalya refused to move. We all know how it unfolded..  The government has two stark choices – to either be King Shalya and demoralize its own Senapathy/General ( read law officers and IRS officers )  or to play the role of Lord Krishna and guide the chariot on the right path. What role it plays, will be as much a factor in the Castleton hearing as the arguments of legal eagles Harish Salve and Mukul Rohatgi.


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