Throw away the tag of retrospective tax republic

The recent tussle between the tax administration and the FPIs is not good for India’s image as a certain and fair economic unit. Already, the Vodafone tax issue has branded India as a retrospective tax republic. The manner in which the last government enacted a law aimed at the past to corner a single investor is not supporting the dignity of the law making system.

Any tax regime which implements laws today about the activities of yesterday is unfair. Tax laws should be prospective and fair.  It is not whether tax revenues are increasing or not or bad maneuvers by the companies are countered or not; but also the fairness of tax laws that reveals the character of a tax regime.

The current issue started with the tax department’s bulk notice to FPIs regarding their MAT dues on capital gains they have made in the past.

With the government coming out with abandoning of MAT in the last budget, the question was limited on whether FPIs should give MAT on the profit they have made in the past.

In the same manner, the reassurance that treaty benefit will survive over domestic tax laws proved that FPIs from treaty countries need not pay the MAT.

The question is now cut short- does MAT apply to non-treaty country FPIs retrospectively?

By making the MAT inapplicable to the FPIs, the government has started a good initiative. It is a right measure taken in the last few years to make India’s tax regime a fair one.

At the same time government should be careful to stop any opportunity to tax department to destabilize the image of the country. For this, tax laws should be well crafted denying any opportunity for flexible interpretations.

The latest update on the MAT controversy is that FPIs are approaching the Bombay High Court against the tax department’s notice. They have made Corporate advocate Harish Salve for the case. Government also indicated that the best way is to go for judicial route.

In future, the government should not leave everything to the court. The maximum effort should be made to design clear tax laws; thereby restricting predator type tax notices.