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And now, finmin P-notes! PDF Print E-mail
Wednesday, 28 March 2012 00:13
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Reports on finmin clarifications soothe markets

If the market’s sudden discovery of the possibility of FII investments (and, within this, investments through Participatory-Notes) getting taxed caused a collapse in the markets on Monday, reported promises by finance ministry sources (Promissory-Notes!) on Tuesday lifted the market mood—after falling 309 points on Monday, the markets finished Tuesday up 205 points. Given how the taxman has gone and armed himself with not just retrospective powers, but a ‘validation’ clause that negates all judgments by any courts, it’s not clear how the market can possibly believe the taxman’s reported assurances. The law, once the budget gets passed, is quite clear that a tax residency certificate of the type issued by the Mauritian authorities which is what allows FIIs to not pay short-term capital gains taxes is ‘a necessary but not sufficient condition for availing’ tax benefits—in other words, the taxman has been given the power to decide which FII is to be taxed and which not.

It is the government’s prerogative to tax or not tax FIIs or any other category of investor—since the budget says R10.8 lakh crore of possible taxes were given up by the taxman in 2011-12 on various grounds ranging from hill-area development to just encouraging corporates to invest, it is clear there is no one uniform tax policy across the country. Given this, some broad points need to be made. First, whatever taxation is to be done, needs to be upfront, and not based on the interpretation of a rule tucked in somewhere in the explanatory memorandum that accompanies the budget document—one interpretation doing the rounds of the impact of the new rules on taxing FIIs is that if investments are routed through Singapore rather than through Mauritius (India has DTAAs with both), there are less chances of the taxes being asked for! Two, there has been no attempt to clean up the tax books—instead of having R10.8 lakh crore of tax giveaways, why not have lower tax rates with no exemptions?

The government also needs to spend some time to provide some clarity, in even its own mind, on what the guiding tax philosophy is. If India’s avowed aim is to attract FDI instead of FII since the former creates jobs and is more long-term, tax law cannot exempt FIIs from paying tax while taxing FDI (like Vodafone, which has invested R32,000 crore and paid R16,300 crore in corporate, customs and service taxes between 2007-08 and 2010-11). Similarly, while those setting up factories in India pay long-term capital gains tax, those investing in stock markets don’t. Indeed, the latest attempt to tax services has thrown up another huge contradiction—while manufacturing firms don’t pay excise duties as long as their annual turnover is less than R1.5 crore, the threshold for charging service tax is just R10 lakh! If the idea is to shield small manufacturing firms from the taxman, surely the same has to apply to the service sector?

 

 

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