Not done

EDITORIAL

A lot of noise seems to have been unnecessarily raised over the issues of tax residency certificate and beneficial ownership for taxation purposes relating to foreign companies operating in India and availing of tax benefits under the double taxation avoidance agreements (DTAAs). While the immediate provocation for that seems to have been a callous comment by a so-called taxation expert on real-time on Budget day, the finance ministry’s quick clarification on the new clause proposed to be inserted in the Income-Tax Act seems to have soothed the nerves of foreign institutional investors. Having said that, it is quite disconcerting for the nation to witness such slanging match at regular intervals with the government trying to plug loopholes in DTAAs through new clauses, and its immediate rebuff by FIIs. This was evident last week when the budget sought to formalise into the direct tax legislation an existing year-old explanatory clause on tax residency certificate. The speed with which the finance minister himself was forced on the backfoot within 24 hours, spoke volumes about the government’s desperation, than the actual insertion of the clause would have suggested. Such display of nervous tension seems particularly alarming, since the budget is far more than a document on taxation of foreign corporate entities and DTAAs. The clarification may have calmed FIIs, but it also begs the question whether the ministry issued only a clarification, or entirely withdrew the new clause. The latter move would imply yet another instance of pussyfooting on attempts to monitor and deter wilful tax evasion through illegitimate use of DTAAs. For one, the clarification was opaque and merely suggested that the concerns of FIIs would be suitably addressed when the finance bill was taken up for consideration and approval by both houses of Parliament. Continued pandering to FII concerns over DTAAs, especially the India-Mauritius route, must stop. Our income-tax laws allow signing up DTAAs with other countries, not only for providing tax relief to taxpayers in either country, even to non-citizens, but also primarily to promote mutual economic relations, trade and investment among citizens-cum-residents between the two countries. The India-Mauritius DTAA, too clearly begins by saying the two countries desire to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment. Note the words “prevention of fiscal evasion with respect to taxes”. The finance minister has a duty to the country’s own citizen-taxpayers not to allow such fiscal evasion, even if the taxable person or entity in question is an FII operating out of Mauritius. Repeated badgering by FIIs driving the government on the backfoot helps no one in the long term — neither domestic taxpayers nor the FIIs themselves. As it is, FIIs are trying to lessen their tax liability with regard to short-term capital gains only. Long-term capital gains from sale of shares and securities are already tax-free in India for everybody. Are FII flows that important that they need to be pampered far more than domestic taxpayers? Perhaps, if the domestic taxpayer was not taxed higher than FIIs, it would give a big boost to domestic flows within the country itself, reducing dependence on foreign flows. There may even be merit in allegations of Indian money itself flowing by way of roundtripping, particularly through FIIs registered in tax havens such as Mauritius.