Highly-placed sources in the government said the notices to foreign institutional and portfolio investors are a genuine demand and cannot be compared with retrospective taxation.
It is one thing to talk about retrospective taxation and complain about it. It is another seeking retrospective exemption from what has to be legitimately paid to the exchequer, the sources said.
They maintained that the current demand of 20 percent minimum alternate tax (MAT) on capital gains made by the foreign investors is what is genuinely due to the government.
They were referring to reported apprehensions among foreign investors that the government was creating a new tax demand using retrospective tax legislation which they fear would deter foreign investment.

"The Income-Tax department has won cases in tribunals (Authority of Advanced Ruling) on levy of MAT on capital gains made by FIIs. If we do not demand tax now, then we could be hauled up authorities like CAG and CBI," the sources said.

Otherwise, the exchequer, they said, would have lost out on genuine tax revenue due. On Monday, Finance Minister Arun Jaitley had sought to defend the notices saying legitimate tax demand cannot be considered "tax terrorism" because India is not a tax haven.

"India is not so vulnerable that every legitimate tax demand is considered as tax terrorism ... we are not a tax haven and we don't intend to be one," he had said. "Taxes which are payable must be paid".
"Taxes which are not payable must not be paid. They should be challenged...but taxes which are payable must be paid," he said, adding "Our fairness has been partly misunderstood. The converse of tax terrorism is not a tax haven."
Stating that some decisions of the past have made the taxation regime adversarial, he had said, "an emerging economy that expects investment cannot indulge in what has been referred to as tax terrorism or very aggressive tax laws".

"But our fairness has been fairly misunderstood. The converse of tax terrorism is not a tax haven. If I read the front page of some newspapers, it is the impression that I get," he said referring to tax demand notices on FIIs.

Commenting on the tax notices, Revenue Secretary Shaktikanta Das said, "I think what FIIs and FPIs are asking is retrospective exemption and not retrospective application of a tax law. Because MAT was leviable on them, therefore these assessment, these demand have been raised."
He said that some Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) had gone to the Authority of Advance Ruling (AAR) which ruled that MAT was applicable.
"Naturally the Income Tax Assessing Officers have raised the demand," he said.

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