The decision by the Bombay High Court to grant Aberdeen Fund Management interim relief has refocused attention on the minimum alternate tax (MAT) issue. Some global ‘gurus’ are again proclaiming that ‘resolving’ MAT is the panacea for all investment-related ills.
The reality of MAT is somewhat more nuanced. The government has tried to resolve it to the extent practical. More broadly, however, MAT is symptomatic of sub-optimal decision and communication management, undoing immense positive sentiment towards India generated by the prime minister and his Cabinet colleagues.
Union finance minister Arun Jaitley, through the budget and subsequent explanations, has more than delivered on his promise — the certainty of future tax treatment as well as clarity on debt funds and the applicability of deferred tax assets (DTAs). Yet, the good news was drowned by news of tax claims on many foreign institutional investors (FIIs). Some funds sought legal recourse and got interim relief. Multiple representations have been made to the government and been received sympathetically. However, as the matter is sub judice, it is difficult for the government to intervene further.
Interestingly, we overlook that just as retrospective taxation is wrong, it is hard to argue the opposite for retrospective ‘untaxing’. The government can help a bit more. Rather than drip-like multiple clarifications, comprehensive FAQs can be released so that ‘unknown’ risks being highlighted in the media are reduced. On sub judice matters, the government can put demands for payment on hold and pro-actively work with the judiciary to potentially club together and expedite a ruling.
While MAT evokes a ‘sentimental’ impact on investment, bigger threats remain that the government and business have to grapple with — unseasonal rains and a potential monsoon shortfall, persistent slack demand, over-leverage and lack of credit and global financial markets exuberance powered by multiple versions of quantitative easing.
There are broader lessons from the MAT episode. The Cabinet has excelled in portraying India as a prime investment destination with a governance paradigm in tune with global markets. Perhaps the bureaucracy needs to buy in more. Even China recognises the important role of investment, especially equities in growth and restructuring the economy. Some actions hint at a regression to the ’80s — ‘investors come to make money and we have to accept them’ and ‘if they don’t like it they can leave’ attitudes. There are two recent examples. Sending a large number of claims just before a budget that effectively ends the basis of such claims and the fiasco of the new tax form. Both may be correct in law, and in theory may have seemed like great ideas. But they are not.
The form was summarily withdrawn and Jaitley and the MoS for finance are spending significant time controlling the fall-out from MAT. Both could have been avoided by being more sensitive and sensible. It’s a linked-up world (and government): ‘Controversial’ decisions are usually passed from department to department like hot potatoes. Could we have formed a core group from the law and finance ministries, and got in communications specialists to gauge the potential fall-out before sending out claims or the tax form? At least, the government could have been ready with some pre-emptive responses.
Specifically on MAT, it is easy to invite three or four top investors and seek their feedback. It is good practice and such a discussion does not impinge on the rights or legal position of the government. It does convey that the government is thoughtful and cares — important ingredients for a long-term engagement with investors.
One hears the argument that ‘the United States has the same rules’. We are not the US. Global investors cannot survive without participating in the US market, but many think they can without investing in India. We need the investment, let’s just encourage it — a fact that the prime minister and finance minister have recognised.
Policies and their execution need a common sense approach. If an idea looks great in theory, but there are clear signs of hurting investor sentiment, it usually is not a wise move to go ahead. As a broader government we need to engage more, communicate more and welcome inputs. Markets and investors are volatile, but let us not provide reasons to not invest in India. There are multiple external challenges to deal with already.
Finally, there has to be a sense of responsibility. The tax claims and the form would have had many people involved, but the decision (and directional guidance) comes from a select few. If these few do not buy into the direction, the prime minister, the finance minister and the Cabinet want to move in, change them.
The opportunity cost of ‘chalta hai’ and ‘baad mein handle karenge’ is too high.
A repetitive refrain in describing India is ‘We love India, we believe the growth and reform story but India does not do itself any favours’. Let’s start to do ourselves some favours.
S Misra is a banker based in Singapore
The views expressed are personal