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Important to have non-adversarial tax regime
April, 07th 2015

Finance Minister Arun Jaitley Monday said India was not so vulnerable that every legitimate tax demand will be waived. Tax authorities are said to have served notices to foreign institutional investors over unpaid Minimum Alternative Tax (MAT) of the previous years, triggering protests from the overseas investors.

Discussing the above issue, Dinesh Kanabar, the Founder of Dhruva Tax Advisors says tax related matters continue to weigh heavily on foreign investors and so it is important to find a non-adversarial and a fair tax regime. Not appealing in Voda case is an example of government not being tax adversarial.

According to him India needs to decide if Supreme Court will decide big tax cases.

Below is the transcript of Dinesh Kanabar's interview with CNBC-TV18's Shereen Bhan and Nayantara Rai.

Shereen: Before I get into the merits of what has happened as far as the Minimum Alternate Tax (MAT) issue is concerned let us look at the statements coming in from this government and specifically from the Finance Minister. This was a government that had promised to go away from tax terrorism, go away from an era of retrospective taxation, this was a government that the Finance Minister across several public forums had stated that the adventurism of the taxman needed to be reigned in and today in the middle of a CII conference the Finance Minister saying very clearly that our fairness has been partly misunderstood. India is not a tax haven; every legitimate tax demand cannot be made a case of tax terrorism. What do you make of all this?

A: First, I would agree with the Finance Minister that there is a tax haven which India is definitely not and then there is tax terrorism. And beyond all these clichés we really need to figure out what is it that constitutes a fair tax regime, a non adversarial tax regime and that is what is more important.

These clichés are not going to take us anywhere. For example I have been hearing you talking about this story on Cairn Energy and again I am not here arguing about merits of any matter but the fact of the matter is that in the respect of Cairn Energy where the Indian company is being proceeded against for a recovery of withholding tax. How could somebody have done something which is impossible to comply, meaning thereby that if at a point of time somebody was required allegedly to withhold taxes and the Supreme Court says the law did not require such withholding how can you retrospectively impose a liability to withhold taxes. Forgetting a tax liability per se but how can you retrospectively determine a withholding thing and that is where we need to come back and say will everything be resolved at the Supreme Court or will the government proactively come back and take a stand.

Shereen: If I could just take the point that you have made forward. This business of whether or not we have actually seen this government move towards providing a more non adversarial tax regime because you mentioned Cairn and I am not getting into the merits of Cairn but when questions were asked of the Finance Minister about dealing with the Cairn matter he said well, this is a legacy issue and we got to address it because it is a legacy matter and the law will take its own course. Are we seeing definitive action on the part of this government to try and address or try and create a non adversarial tax regime?

A: At a policy level absolutely yes. There is every attempt being made by this government to create a non adversarial tax regime. The first example of course is the non filing of the appeal to the Supreme Court in the case of Vodafone on the transfer pricing matter or for example this entire approach that the Finance Minister took which was very welcome to say that I am going to do away with tax exemptions and deductions and bring down the rate of tax which because it is the exemptions and deductions which creates huge amount of controversy or for example the entire abolition of wealth tax or the pushing back of general anti-avoidance regulations.

What I am not able to understand is first of all we have a situation where every litigation ends up with 15-20 into Supreme Court. Is that a tax regime which this government wants to encourage? Can we not really come back to a situation where one can come up with a reasonable tax policy in advance where the government puts its stated intention and implements it and that is where I find there to be gaps between what the government is prophesying and what the government is actually implementing.

Shereen: Now if you could specifically address the issue that is the big bone of contention which led to the Finance Minister’s statements this morning and that is the issue of MAT being levied on FIIs and FPIs. You heard the revenue secretary on that story saying very categorically that the tax man is sending out these demand notices because of the AR ruling in 2012 which basically upheld the taxman’s point of view?

A: So we have two rulings from the authority for advance ruling. One which is a favourable one to the assessees, other which is a negative one and the one which is pending before the Supreme Court and is being examined by Supreme Court. It has been there out at least for the last two, two and a half years and one is awaiting Supreme Court awaiting this matter.

You may be aware for example very recently that Supreme Court has actually set up a bench which now is hearing tax matters on a day to day basis and one is hoping that this matter which is pending before Supreme Court is decided sooner rather than later but one question which comes up, so one is on the merit part.

On the merit part the question is that whether a foreign institutional investor who does not have any base in India, who is not required to maintain books of accounts in India, can there be a liability to book profit tax at all? Now that is an issue on merits which will be decided by the Supreme Court but look at this issue, you have a situation today where for example you have ECBs and there is a concessional rate of tax provided of 5 percent withholding on ECBs. Are you going to charge book profit tax of 20 percent? Then why do you have a regime of five percent? Or let me give another example, in this finance bill the Finance Minister came back to say that we are reducing the withholding tax on royalties and fees for technical services from 25 percent to 10 percent. Now are you going to subject these recipients to a book profit tax because then you will say now pay MAT and therefore any rate of tax below 20 percent which is effectively what the book profit tax comes up is illusionary. So, somewhere in the line I find that there is a gap in this entire thought process and the government needs to go back and relook at it.

Shereen: Do you feel investors (both foreign or domestic) that tax related concerns continue to occupy mind space and boardroom space because that we saw happen in the final years of the UPA. Do you believe that there is any comfort level being seen on that front or do you believe that tax related concerns continue to weigh in on investor sentiment?

A: Unfortunately I would like to believe that the tax related matters continue to weigh very heavily. If all the FIIs are going to sit back and look at what were the earnings which they had over the last few years and are today called upon to pay a book profit tax it is going to be an absolute disaster if I may say so. While the government has taken significant steps at a policy level, I think at an implementation level a lot more needs to be done before we can actually say that India has a non-adversarial tax regime.

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