A sense of relief has set in among foreign investors as the government moves all out to eliminate their concerns on taxation. True to his word, finance minister Arun Jaitley has taken definitive steps in the past few days to end a set of things, which came to represent a term he himself had made famous - tax terrorism. After putting the minimum alternate tax (MAT) devil to rest, the government is planning to end large disputes including those with Cairn India and Shell through executive or judicial resolutions.
Market participants see these as steps in the right direction, which will be beneficial to the economy in the long run. Another encouraging sign seen by tax consultants is that during the course of transfer pricing assessments for the assessment year (AY) ending March 2012, which are currently under way, no new 'hot issues' have been unearthed by the taxman so far. The adjustment orders for AY2012, are expected between January and March 2016.
Dinesh Thakkar, chairman and managing director, Angel Broking, said: "Simplification of the tax structure and resolution of these pending issues will definitely create more confidence among foreign investors. With the certainty coming in taxation issues, they would have more confidence about how to build their valuation models."
Thakkar added these changes along with the impact of reducing interest rates would result in re-rating of the valuation of Indian stocks. This would, in turn, lead to higher flows that are beneficial to the economy, he said. "This government is pro-investors. It realises that to achieve growth rates of 8-10 per cent, it needs foreign inflows."
U R Bhat, managing director at Dalton Capital advisors (India), said: "These are steps in the right direction." The measures undid the damage what Bhat called "an aggressive interpretation" of the MAT provisions. "Anyone who knew about taxation knew MAT was introduced primarily for domestic corporations."
However, these steps have raised hopes for more reforms with suggestions to have a wholesome look at the various tax issues in a wholesome manner and have a comprehensive tax policy for foreign portfolio investors (FPIs). Some consultants also suggest a permanent body like Shah panel, which could consider large tax demands before these are raised.
Bhat of Dalton added that as a nation, India still doesn't have clarity on how to deal with investments from foreign portfolio investors (FPIs), though "we have been around for 23 years now".
Bhat suggested: "We need to draft a separate tax policy for FPIs. Various issues such as double-taxation avoidance treaty, whether to treat earnings as short-term capital gains or business income, place of residence and transfer pricing need to be addressed in a wholesome manner."
Consultants feel the government's aim should be how to thrash out issues before demand is raised rather than passing orders, going to court and then doing U-turns. For example, one potential tax issue that could flare in the future is incidence of value-added tax in e-commerce transactions. Companies such as Amazon argue they are a marketplace and they just bring buyer and seller together. Technically, they are right. But from the government's perspective, there is an incidence of tax. There seems to be no clarity on how the government would recover this.
Samir Gandhi, partner, Deloitte Haskins & Sells, agreed. Gandhi said, "Let the industry and investors be part of the tax policy making rather than you do something and then go for redressal. MAT is solved. But the scar remains."
Gandhi felt a permanent body like the A P Shah panel should be formed, which can look into contentious issues even before demand is raised.