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Tax dept blamed for policy uncertainty
May, 22nd 2014

The revenue department seems to be coming under renewed pressure over handling of tax issues with the commerce and industry ministry flagging the unpredictability of tax regime as one of the key issues deterring investments, even as the government has for the first time acknowledged that it allowed commodity futures trading without adequate regulatory checks and balances.

Although the focus so far has been on a plethora of tax disputes that the government has been entangled in — from Vodafone to Nokia and Shell — the commerce department, which had pushed for special economic zones (SEZs) to attract investment and boost exports, has blamed the revenue department for levying taxes after the Centre had explicitly promised a zero-tax regime.

The comments are in response to a Cabinet secretariat driven exercise to find out steps that could have been avoided during the UPA government's tenure.

When the SEZ law was enacted in 2005, it was clearly provided that neither minimum alternate tax nor dividend distribution tax would be levied. But, finance minister Pranab Mukherjee withdrew both the concessions, after the tax department complained of loss of revenue. Officials said it was the first instance of the government going back on its promise and international investors took note of the issue. What followed subsequently was a retrospective amendment to the Income Tax Act to allow imposition of capital gains tax on Vodafone's acquisition of Hutch's stake in its Indian telecom operations despite the Supreme Court ruling that the tax department did not have any jurisdiction over the issue.

Even the department of industrial policy and promotion (DIPP), which deals with foreign direct investment, has flagged the predictability of tax regime as an area of concern. It is also critical of the free trade agreements that India has signed and sees it as one of the factors eroding Indian manufacturing, a concern which is shared by the finance ministry as well.

Several corporate chiefs have already gone public against the revenue department's stance but attempts by Mukherjee and his succecsor P Chidambaram failed to rebuild confidence in the tax authorities. The commerce ministry, which has piloted the trade pacts, has, however, listed them as an achievement despite Indian industry crying foul over imports getting cheaper.

What has come as an even bigger setback is the consumer affairs ministry's admission that the department "should not have created the commodity market without adequate regulatory checks and balances". The market, which has lost some sheen in recent months after a spate of controversies, has been waiting for a full-time regulator on the line of Sebi and RBI for several years as the UPA government failed to amend the law governing trading in commodities trading. As a result, the penalties remain weak and the regulator FMC does not have direct control over manipulators.

The confusion in the space was evident in the collapse of the National Spot Exchange Ltd (NSEL) where settlements of Rs 5,500 crore are still awaited. In fact, NSEL is another failure that consumer affairs ministry acknowledged.

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