Finance ministers in India excel in delivering long budget speeches, and often end up creating more confusion than clarity. Lack of clarity causes needless litigation. Everyone craves for a simple, clear and stable tax regime. Yet this seems a hard-to-realise goal. Foreign investors are particularly foxed. On the one hand, Indian government representatives lure them with incentives and on the other, they are subjected to what the BJP has famously called “tax terrorism”. As Finance Minister, Pranab Mukherjee delivered a shock with a retrospective tax. Shaken, they headed for the exit door. His successor, P. Chidambaram, struggled to undo the damage. The Modi government has not just failed to contain “tax terror”; it has continued the policy of flip-flops.
In his 2015 budget speech Arun Jaitley said “going forward”, MAT will not apply to foreign companies. Tax officials interpreted Jaitley’s remark to mean that MAT would apply to past profits. MAT is the minimum alternative tax payable by profit-making companies that do not pay the corporate income tax because of incentives and exemptions. A month later, Jaitley said India was not a tax haven and taxes payable by foreign investors should be paid. Finance officials emphasised that the government would not bow to pressure from FIIs (foreign institutional investors) for “withdrawing taxes worth Rs 40,000 crore that are due from earlier years”. After going through a needless exercise of appointing a committee Jaitley announced on Tuesday a waiver of the retrospective imposition of MAT in a bid to restore the shaken confidence of foreign investors. This rite of appeasement he could have performed without help from the AP Shah committee. Or he could have waited for the Supreme Court verdict on the MAT issue in the Castleton Investment case.
Foreign investors are now quitting India in droves, jolted by China’s slowdown as well as weak corporate earnings and less-than-rosy growth prospects in India. In August they pulled out $2.6 billion, the worst outflow since January 2008. India’s 8% plus growth claims have few takers. Moreover, the Modi government’s reform agenda no longer inspires confidence. In this backdrop Jaitley’s MAT concession would not enthuse FIIs too much.