1. 100 foreign funds get tax demands; total bill may hit $10 bn

100 foreign funds get tax demands; total bill may hit $10 bn

In the biggest-ever tax demand slapped on them, nearly 100 foreign funds have been asked to cough up an estimated USD 5-6 billion...

By: | New Delhi/mumbai | Published: April 5, 2015 3:38 PM
Indian rupee, US dollar, tax demand

In the biggest-ever tax demand slapped on them, nearly 100 foreign funds have been asked to cough up an estimated USD 5-6 billion for ‘untaxed gains’ made by them in the Indian markets over the past years.

In the biggest-ever tax demand slapped on them, nearly 100 foreign funds have been asked to cough up an estimated USD 5-6 billion for ‘untaxed gains’ made by them in the Indian markets over the past years.

The number of affected investors can rise substantially as assessments are still in progress and notices could be served in many more cases, taking the overall tax demand from them to well over USD 10 billion, sources said.

Spooked by these “retrospective” notices and assessment orders, the foreign investors have begun lobbying intensely with the policy makers and regulators, while stating that the move goes against the government’s stated position of providing a ‘non-adversarial and stable tax regime’.

Till March 31, close to 100 FIIs got notices from the Tax Department for a controversial Minimum Alternate Tax (MAT) of 20 per cent, while they are now being followed up with Assessment Orders.

The FIIs have, however, decided to challenge the tax demands, stating that MAT cannot be levied on FIIs or FPIs as they do not earn any ‘business income’ in India and their income is defined as ‘capital gains’ under the I-T Act.

These FIIs, many of whom have now converted themselves into Foreign Portfolio Investors (FPIs), include entities from the US and Europe as also those operating through Singapore, Hong Kong and Mauritius.

Among others, the issue has been raised by FIIs with Finance Minister Arun Jaitley, Minister of State for Finance Jayant Sinha, capital markets regulator Sebi, the Central Board of Direct Taxes and the top Finance Ministry officials, while they are now planning to approach Prime Minister Narendra Modi to intervene in the matter.

When contacted, a top official said that the government is looking into the matter to allay any ‘genuine concern’ such investors might have, but added that no assurance can be given as of now to nullify the notices.

There are an estimated 8,000 FPIs registered in the country and they have emerged as a mainstay of the Indian markets over the years with an overall outstanding net investment of USD 226 billion (over Rs 11 lakh crore).

This includes over Rs 8 lakh crore in stocks and Rs 3 lakh crore in debt markets. In the fiscal 2014-15 itself, FPIs made a net investment of Rs 2.7 lakh crore into the Indian markets.

Interestingly, this is the first time since 1993, when FIIs were allowed to invest in the Indian markets, that such investors have been asked to pay MAT.

Amid concerns that investor sentiment can take a bigger hit as similar demands may be slapped on foreign companies, many international bodies have red-flagged the latest move of the Tax Department, saying “this may act as strong deterrent for foreign investment in India”.

These organisations include European Fund and Asset Management Association (EFAMA), Asia Securities Industry and Financial Markets Association (ASIFMA) and ICI Global, while many foreign funds have also individually raised the issue.

MAT is generally applicable to domestic and foreign companies having a ‘place of business in India’ that are required to draw up a balance sheet and a profit and loss account for their business income.

However, the Tax Department began issuing tax notices to FIIs as well late last year.

To clarify the situation, Finance Minister Arun Jaitley in his Budget this year proposed to amend the relevant sections so as to specifically “provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to an FII, shall be excluded from the chargeability of MAT…”

However, these “amendments will take effect from April, 1, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years”.

It is this ‘prospective’ nature of the clarificatory amendment that has led to the Tax Department continuing with its notices and assessment orders for MAT demand from the FIIs for the past years.

Indian tax laws allow such notices and assessments to be issued for up to seven previous years.

Experts, however, said that such tax demands would also override benefits enjoyed by foreign entities under India’s bilateral tax treaties with Mauritius and Singapore — two jurisdictions that account for a major chunk of overseas inflows.

“The current action by the tax authorities practically results in overriding the favourable capital gains tax provisions in India’s treaties with countries such as Mauritius and Singapore,” said Sudhir Kapadia, National Tax Leader at EY, said.

The situation has created “avoidable uncertainty” in taxation of an important source of foreign investment in the Indian economy, he added.

Ketan Dalal, Senior Tax Partner at PwC, also said that the uncertainty over MAT is hurting investor sentiment and was creating “the image of a tax regime where unpleasant surprises seem to be the norm”.

Rajesh H Gandhi, Partner at Deloitte Haskins & Sells, said uncertainty over MAT could hurt the investor sentiment.

“So far, only FIIs have received MAT demand but there are also concerns that it would be extended to foreign companies as well…. Now only about 10 per cent of FIIs have received such notices and numbers could increase in due course.”

Notices have been mostly received by foreign portfolio investors for the financial year 2011-12 but there are concerns that the Income Tax Department could even go back up to seven previous years from today for assessment purposes.

Girish Vanvari, National Head of Tax at KPMG in India, said concerns about MAT is a “matter of uncertainty” and it would dampen investor sentiment.

Dalal said the I-T Department seems to have sent the notices after misreading the MAT provisions.

“In the absence of a favourable clarificatory retro amendment, needless chaos has been created, and significant litigation will be inevitable,” he said.

On ways to address the concerns, experts opined that the government needs to amend the law and clarify that MAT would not be applicable on any FPIs or foreign companies.

“To address the concerns, government should urgently clarify that MAT is not applicable to all foreign companies (including FPIs), and that this is the position since MAT MAT (and not just from April 1, 2015),” Dalal said.

In its communication to the Indian government, ICI Global said the recent notices appear to be in conflict with the stated objective of providing a “stable, non-adversarial and predictable tax regime”.

“Moreover, they appear consistent with practices that have caused to the investing community many concerns over recent years,” it added.

Coming under the MAT umbrella would likely dent profits and take away the structuring advantage on which FPIs relied, as per US-based law firm Duane Morris LLP.

“We would like to express our deep concern in relation to this unexpected change in the position of the tax offices in India.

“… This attempt to apply and levy MAT to income and capital gains earned by FIIs/FPIs would have several implications for both foreign funds and the investment of foreign investors in India,” EFAMA said in a communication to the Finance Ministry.

Going by the history and logic of introduction of MAT, experts said it is only for Indian companies and never meant to be applicable for foreign companies.

“In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT,” Finance Minister Arun Jaitley had said while presenting the Union Budget 2015-16.

FIIs and FPIs typically earn through interest, dividend payouts and capital gains on their investments. Short-term capital gains (on securities held for less than a year) are taxed at 15 percent, while long-term gains are tax-exempt.

Dividends paid out of shares are exempt from income tax and are only subjected to the Dividend Distribution Tax, while interest income on certain debt securities are taxed at 5 per cent, while tax rate can be 20 per cent in some cases. Besides, benefits of double tax avoidance treaties are also granted to the FIIs and FPIs, wherever applicable.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

  1. B
    Apr 5, 2015 at 4:31 pm
    This is also going to have the same fate as Vodafone case - BJP Government is going to yield to foreign pressure just like it did on Vodafone case - Only difference is it will kneel down even before umpteen years of court procedures.
    1. S
      Apr 6, 2015 at 2:38 pm
      Next a campaign for recovering $100 billion benami black money inside the country.
      1. T
        t p
        Apr 5, 2015 at 4:17 pm
        Like STT , TDS may be the right solution.
        1. V
          Vibhor gambhir
          Apr 6, 2015 at 12:44 am
          Since Our Finance minister Mr. Arun jately had announced on budget day that MAT will not attract FII from 1st April 2016 i.e for FY 2016-17. However Income tax department issued a demand for last 3 years. It means amount has to be paid by foreign investors.

          Go to Top