India plans to set up a high-level committee to sort out taxation issues of the past and make the system predictable, Finance Minister Arun Jaitley has said, while seeking to contain the adverse fallout of revenue department's move to levy MAT on foreign investors.
"Even though it is only the legacy issues (concerning taxation) that haunt us, we recognise that we must put a quick end to them.
"I am considering a high-level committee to explore what can be done to resolve the past and move beyond it in a way that would provide real predictability and certainty to investors," he wrote in an opinion piece in Financial Times.
"This committee will be instructed to report back expeditiously so that early actions can be taken.
“We have fashioned tax policies for the 21st century.
“Our tax administration cannot afford to lag behind. We will not let it," Jaitley said.
The disputes that are now attracting attention are legacy cases, which are tax demands arising from actions that the tax authorities and the judiciary took before National Democratic Alliance government came to power.
Explaining the levy of MAT on foreign portfolio investors, Jaitley said the decision was taken not by the government, but by quasi-judicial bodies, which were created well before the present government came to power to reassure investors that
Following a ruling by the Authority for Advance Rulings, the revenue department has sent notices to 68 foreign institutional investors for payment of dues totalling Rs 602.83 crore (Rs 6.02 billion) towards minimum alternate tax.
"However, we have made clear that these rulings can be contested in higher courts, which will respect due process and have the power to quash faulty decisions.
“We also made clear that our international tax treaties cannot be overridden by these rulings," Jaitley said.
Since some of the rulings of quasi judicial bodies went in favour of foreign investors, the tax department had little choice but to respect these decisions, he added.
"The rule of law cuts both ways.
“We cannot say it is undermined when we take retroactive actions, and at the same time seek to override, retroactively, the decisions of our institutions," Jaitley said.
He said the 2015-16 Budget has done away with taxation which could be construed as unfriendly to investors.
While general anti-avoidance rules has not been implemented, minimum taxes on foreign portfolio investors have been removed.
Perhaps most significantly, when the courts decided in favour of Vodafone and Shell in their long-running multi-billion tax disputes with the Indian government, the government did not challenge their verdicts, Jaitley said.
"Yet, we have not been entirely successful in convincing investors of the fairness of our tax system.
“New cases of unexpected tax demands have cropped up, the most recent one being the MAT," he said.
