Why the DRP notice to FIIs on MAT is good news for the market

On a close reading, it is clear that the notices seem to be a move in the right direction since they seek information that will speed up court proceedings

The impression that the market gets from the finance ministry is that its right hand does not knows what its left hand is doing. On the one hand, Finance Minister Arun Jaitley has constituted a committee to look into the legality of MAT (minimum alternate tax) demand on foreign institutional investors. On the other, his own tax department is sending notices to the same investors. On news of these notices, there was once again a small panic in the markets. No one from the finance ministry spoke to dispel these fears.
 
On closer reading, though, the notices seem to be a move in the right direction. The notices were in response to the appeal filed by FIIs in the court that they should be granted relief on the MAT issue. The notices merely sought details of grounds of appeal of the FIIs and why they should be granted relief. The Dispute Resolution Panel (DRP) has also sought that the FIIs furnish information, within nine days, of profit and expenses that they had not given to the assessing officer.

 
These notices are in response to an action committed by the FIIs. If anything, the notices point out that legal proceedings would be speeded up. Experts were under the impression that legal proceedings would start only in December.
 

The confusion was created because the government has set up a committee headed by Justice A P Shah to look into the legality of the MAT demand on FIIs for previous years. At the same time the government had said that any fresh notice making a demand for MAT would be suspended till the three-member Shah committee gave its report.

 
However, the markets were under the impression that the government’s statement included any notice relating to the subject. Rajesh Gandhi, partner, Deloitte Haskin & Sells says “These notices can confuse the foreign investor community. On the one hand, the government has said the notices making a MAT demand have been kept under suspension and the Shah Committee has been set up to look at the past cases. On the other, the DRP is sending notices indicating the start of legal proceedings.”
 
The blame in the MAT issue cannot be completely put on the government. Jaitley said in an interview that the controversy over MAT arose in 2012 when the Authority for Advance Rulings (AAR) took a view different from its own 2010 view. The problem was created by the FIIs themselves, says Jaitley. They had an existing opinion, yet they went for a fresh opinion and then got a hostile opinion. Having got an opinion in 2012, neither they nor the UPA government did anything. It is only in 2015 when the deadline came and the assessing officers sent notices that they woke up to the issue.

 
Irrespective of who is to be blamed, the present notices point out that it’s the beginning of the end. Resolution of the MAT issue on FIIs is not far. Having said that, the current NDA government should be proactive in cooling markets’ nerves on this critical issue and communicate as clearly and as soon as possible.