Whether the scrapping of the minimum alternate tax (MAT) for foreign institutional investors (FIIs) will bring the FPIs back will have to be seen, but it certainly was one of the irritants that kept them out of the Indian stock markets. The income-tax department had sent 68 FIIs notices for MAT dues totalling '602 crore for the period before April 1, 2015. The MAT had been in existence for nearly two decades and the I-T department had never asked the FIIs to pay MAT as they came under a section that benefited them.
The government initially supported the tax department interpretation that enabled them to apply the retrospective tax to the FIIs. It may be recalled that Union finance minister Arun Jaitley, justifying the tax, had said India was not a tax haven. However, the FIIs were adamant and a couple of them went to court. In August alone they had withdrawn a record $2.55 billion from Indian equity markets and have been net sellers for several months. As the protests grew louder, the government appointed the A.P. Shah Committee to go into the cases of retrospective MAT. On Tuesday, the committee’s recommendations against the imposition of retrospective taxes was accepted by the government.
This, however, is a temporary palliative for the markets, but necessary to establish the government’s credentials, and particularly those of the finance minister who never loses an opportunity to assure foreign investors that there would be no more retrospective taxes. He said the offending section would be amended in the next session of Parliament.
There is a need for the government to remove all ambiguity from the I-T manuals. Many of them are framed in a way to give discretionary powers to the tax authorities and a lot of harassment to taxpayers. There is also a crying need to make them simple and understandable to the layman.
With this uncertainty out of the way it must be admitted that the markets are down for several reasons, the prime one being the uncertainty created by the US Fed’s ambivalence on its quantitative easing programmes. This ambivalence is probably the single most deadly factor that has destroyed global wealth. The markets have been on tenterhooks since May 2013 when the then Fed chief, Ben Bernanke, first mentioned the possibility of withdrawing the QE programme. It sent both the stock and currency markets into a tailspin. The other reasons are China’s slowdown and the general slowdown in all economies, including that of India.
