Govt should have abolished MAT on infra firms

Founded in March 2008, Bharucha & Partners offers expertise in different fields of legal practice with corporate or mergers and acquisitions, banking and finance, litigation, arbitration, capital markets and financial regulation being its core areas.

Kumkum Sen, Partner of Bharucha & Partners feels that the union budget 2013-14 should have abolished the Minimum Alternate Tax (MAT), which is levied on infrastructure companies. Sen argues that a high MAT rate can have a significant impact on the project Internal Rate of Return (IRR). As a result, projects do not fully benefit from the tax incentives provided by the government. Therefore, MAT rates should be reduced or exempted for infrastructure projects, she explains.

"The Finance Bill has been a bit of a disappointment. Not only has the report by the Shome Committee, recommending that FII’s may be made completely tax free, not been provided in the Budget, but the tax burden has actually increased on account of the increase in the rate of surcharge for corporate investors."

Following is an excerpt of Sen’s response to queries raised by Raja Iyer, Research Analyst at Asapp Media.

The Government deferred the introduction of GAAR by three years. Do you feel now all the uncertainties related to FII investment in the country is cleared? If not, what is your suggestion to the government to address foreign investor apprehension?
The government has rightly postponed the introduction of GAAR for three more years. The biggest issues facing the implementation of GAAR is the wordings of the proposed regulations itself, specifically with the phrase ‘where one of the main purposes is to obtain a tax benefit’, because the regulations may allow the authorities to enforce these standards upon any agency they see fit. Here given that ‘tax benefit’ is worded unreasonably widely, one hopes that this issue will also be addressed. Following this controversy, the FM’s budget assurance of rewording the phrase as ‘with the main purpose of obtaining a tax benefit’ has significantly narrowed down the scope of applicability of GAAR. The assurance, based on the Parthasarathi Shome panel’s recommendation was essential to dispel investor’s concern on how the tax authorities armed with discretionary powers would act. The Tax authorities in the light of this panel, has ample time to go through this without a knee jerk operation.

Infrastructure companies demanded removal of MAT in the union budget. Do you think, the government should have abolished it?
Yes, the government should have abolished the Minimum Alternate Tax. The MAT rates have increased consistently in the previous budgets from 7.5 percent in 2001-2002 to 18 percent. A high MAT rate can have a significant impact on the project Internal Rate of Return. As a result, projects do not fully benefit from the tax incentives provided by the government. Therefore, MAT rates should be reduced or exempted for infrastructure projects.

According to some industry watchers, the budget has not done enough to bring about an efficient dispute resolution mechanism. It is argued that the discretionary approach of revenue authority in taxing FII investment is dampening sentiment. Can we have your comments on that.
The Finance Bill has been a bit of a disappointment. Not only has the report by the Shome Committee, recommending that FII’s may be made completely tax free, not been provided in the Budget, but the tax burden has actually increased on account of the increase in the rate of surcharge for corporate investors. Further, though the FIIs are proposed to be allowed to trade in currency derivatives, the tax treatment of gain or loss from currency derivatives and set-off of loss from such activity against other gains earned by FIIs has not been dealt with and certain ambiguities have to be dispelled.

Do you think it is legitimate on the part of the revenue authority to claim tax on sale of shares by Shell to its parent firm?
The disagreement between the Revenue Authorities and Shell relates to the applicability and procedure of transfer pricing, when shares of a subsidiary company are transferred to its parent firm. As per the RBI pricing guidelines, price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted companies. The Tax Authorities have taken the view that as the transaction between Shell India and its global parent is an international transaction between Associate Parties, it satisfies the two conditions for the transaction to be brought under the TP net. Also, the transfer pricing order has valued the issue at Rs 183 per share even though there is no provision under the Income Tax laws for such revaluation. The Attorney General’s opinion is sought to clarify this issue, so there is nothing further to say on this issue.

What are the deficiencies in the transfer pricing policy in the country and how can they be addressed?
The main deficiency, inter alia, is with regard to clarity in the sale transaction of shares by a subsidiary company located in India to its parent firm located outside.

Do you think it is advisable to have a variable rate structure for GST with a floor rate and a permissible band (in order to give states the flexibility to fix rates)?
We should have a Central GST and a State GST with the states free to have different rates for the state GST so that we can preserve the autonomy of states and enhance healthy inter-state fiscal competition a race to the top and not to the bottom. This proposal only needs an appropriate Information Technology (IT) infrastructure for Inter-State Tax Credits (ITC). The "Aadhar" program (Unique ID authority) is helping prepare such an infrastructure for the non-varying GST proposal in any case.

Over-Centralization has kept many states poor by preventing them from exploiting their comparative advantage. Moreover, it is common in India to allege that the central government, if it belongs to a different party or coalition, is fiscally discriminating against one’s state. Centralization allows partisanship to fester further. A state could choose to have great infrastructure and social insurance, and firms might be ready to pay higher taxes to locate there, which at the end of the day is better for economic growth of a state and thereby the nation itself.

Do you thing there is a need to include petroleum products in the GST constitution amendment bill?
The inclusion of petroleum products in the GST (Goods & Service Tax) will prevent distortions and help industries providing services to the petroleum sector to claim tax credit, at present, downstream industries cannot claim tax credit, and this breaks the credit chain. But even if it is included within GST, it needs to be clarified if they will be eligible for availing input tax credit or not, Also the inclusion of petroleum products under GST will eliminate stranding of taxes paid by suppliers as well as by the industry at different stages in the petroleum value chain besides enabling states and the centre to capture full revenue potential. Exclusion of petroleum products through the proposed Constitutional Amendment Bill is not desirable since it will require another Constitutional Amendment to levy GST on these products, even if the centre and the states were to reach a consensus on full or partial or stage-wise implementation of GST for the sector, in future.

The union budget proposed the setting up of a Tax Administration Reforms Commission (TARC). What according should be the terms of reference for this commission?
This Commission shall review the application of tax policies and tax laws. Also it shall submit periodic reports that can be implemented to strengthen the capacity of the tax system.

The union budget classified foreign investment of upto 10 percent of stake in a company as FII and above 10 percent as FDI (in accordance with the practice in OECDs). Can we have your comments on the move?
The Budget proposal said that from April 1, all foreign investments with 10 percent holding in a company will qualify as FDI while anything up to 10 percent or less will be classified as FII. FDI entities, which typically come through joint ventures and strategic partnerships, as a result have greater powers in terms of share transactions and voting rights, while FIIs can only trade in open market transactions and have limited voting rights, according to capital market regulations. Also, FDI entities are allowed to conduct private transactions while FIIs are not. The new classification will also allow foreign investors to invest more as institutional investment and may not be considered a part of FDI in a company. One of the risks could be that companies investing as FDI and FII may act in concern and exercise significant influence on the voting decisions of the company. One has to see how the formulation of the policy will deal with such grey areas.