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So what did the PM say? PDF Print E-mail
Tuesday, 27 December 2016 00:49
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FM’s assurance on no tax hike doesn’t reassure market

 

If the FIIs general move away from emerging markets wasn’t bad enough, prime minister Narendra Modi’s statement about “those who profit from financial markets (needing to) make a fair contribution to nation-building through taxes” has further spooked the sensex that lost 233 points on Monday. Though finance minister Arun Jaitley has said the media had misinterpreted the PM’s comments, most feel there is some additional taxation on markets that is in the offing. After all, the report of the PM’s speech on the official website is quite explicit when it says “for various reasons, the contribution of tax from those who make money on the markets has been low …To some extent, it may be due to illegal activities and fraud … the low contribution of taxes may also be due to the structure of our tax laws … Low or zero tax rate is given to certain types of financial income … We should consider methods for increasing it in a fair, efficient and transparent way”. If this isn’t enough, a tweet from @PMOIndia says “Those who profit from financial markets must make a fair contribution to nation-building through taxes: PM @narendramodi”. Theoretically, this could apply to plugging loopholes like bonus-stripping or penny stocks, but surely the prime minister doesn’t need to get into such mundane detail?

 

And if this was an isolated incident, it would be one thing. Last week, the taxman issued a clarification that said FIIs could face larger tax liabilities, and there has been no subsequent statement even after the issue was raised in the media. In response to a query on the application of the retrospective Vodafone clause to FIIs, the taxman said investors in FII funds will be taxable in India under certain conditions. If a fund set up in, say, Mauritius, and over 50% of its investments are in India, the fund pays taxes on all its transactions in any case through securities transaction tax (STT) or whatever other taxes are applicable. Yet, the taxman said the investors who owned more than 5% in this fund would be liable for further taxation in India when he/she decides to exit the fund? Since the Vodafone amendment was never supposed to apply to portfolio investment, this is decidedly odd and suggests creative interpretation of the law by the taxman. Answers to queries on sub-funds invested in India, where investors owned less than 5% of the parent fund, also said they would be taxed in India – to make things even more uncertain, there is also no clarity if the taxes would only be applied prospectively.

 

In such a situation, apart from the finance minister’s statement, perhaps the taxman needs to come out with a clearer written statement, else the market will continue to remain spooked till the Budget next month – the issue of taxing investors in FII funds also needs to be suitably clarified. With investors already spooked over demonetization and the PM’s talk of moving decisively on benami property at the start of the new-year, the government needs to assure investors of its intentions. In the case of benami property, for instance, there is the fear that the powers given could allow the taxman to indulge in more rent-seeking by harassing innocent taxpayers – one way to deal with fears of inspector-raj is to ensure that such powers are not given to lower-level officials but are centralized in a panel that comprises very senior officers. As a general rule, sweeping changes of the type the prime minister has hinted at need to be debated openly, in public fora, and not brought in as a surprise on the day of the budget or through a clarification/notification. 

 

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