Stung by foreign portfolio investors (FPIs) massively pulling out of the Indian capital markets in the last few days, in what reflected their persisting worries over minimum alternate tax demands despite recent steps aimed to soothe them, the government on Monday put on hold issuance of fresh MAT notices to them on capital gains made in the past. It also said that till a recently constituted high-level panel gave its views on the levy of MAT on FPIs in the past years, no further assessments in this connection would be done by the tax department’s field officers.
The Central Board of Direct Taxes in a circular issued to its international taxation wings also asked them to refrain from any coercive action for recovery of the MAT demands already raised on FPIs of all types.
Tax experts welcomed the move, which came as a sequel to the measures announced by finance minister Arun Jaitley recently to provide relief to FPIs. The Finance Bill approved by Parliament recently gave prospective (starting FY16) MAT exemption for income foreign firms earned from securities transactions and interest, royalties and fees for technical services. The exemption would apply only in those cases where the tax rate is below 18.5%.
While no relief was offered retrospectively as demanded by FPIs, Jaitley referred the issues over payment of MAT by FPIs as well as a few other tax issues to a committee.
The committee will be headed by justice AP Shah, the chairman of the Law Commission. “The committee is requested to give its recommendation on the specific issues of MAT on FIIs (foreign institutional investors) expeditiously. The government will consider the recommendation of the committee and take an appropriate decision as early as possible,” he said in the Rajya Sabha last week.
Monday’s CBDT circular said: “Issue of fresh notice for reopening of cases as also completion of assessment should also be put on hold unless the case is getting barred by limitation.” While Jaitley did not set any time frame for the panel to submit its report, it was expected to give its recommendations soon, sources said.
While FPIs from countries with which India has double taxation avoidance agreements providing for capital gains tax (like Singapore and Mauritius) can use them to reduce or negate the tax burden, those from other countries including the US and UK can’t use these pacts. About 32% of the FPI investments in Indian equities come from US-domiciled firms, 22% from those based in Mauritius, and 9% from Singapore-based entities.
That the FPIs’ tax worries have escalated is evident from their cutting exposure to Indian capital markets in recent months. Although between January and April net investments by FPIs in Indian debt and equity markets totalled Rs 94,241 crore, a steep month-on-month decline has been in evidence. FPI investments in January 2015 stood at Rs 33,688 crore, before dropping to Rs 24,564 crore in February, Rs 20,723 crore in March and Rs 15,266 crore in April. So far this month, these investors have withdrawn an estimated Rs 12,256 crore from the Indian markets.
Commenting on the CBDT’s latest move, Rajesh H Gandhi, partner, Deloitte Haskins & Sells, said: This is indeed a very positive development. A lot of FIIs who have not received notices so far have been quite concerned and anxious to know if and when they will receive a notice and how they should approach the matter given the uncertainty on the MAT issue. FIIs should therefore be relieved to know that no further notices will be issued till the committee issued its report. All eyes will now be on the committee and the FII community will be keenly waiting for the committee’s recommendations. This also shows that the government is trying to be sensitive to the concerns of taxpayers.”
According to statement made by the government in Parliament, the tax department issued notices to 68 FPIs with demands of Rs 602 crore as MAT on capital gains. However, the industry estimates if the taxman persists with slapping tax demands on FPIs for past capital gains, the amount could grow to many multiples of this.
While several FPIs including Castleton Investment, National Westminster Bank, BNP Paribas and First State Indian Subcontinent Fund have contested the MAT demands received by them in courts, the Bombay High Court last week stayed one on Luxembourg-based Aberdeen on technical grounds.
Amit Maheshwari, partner, Ashok Maheshwary & Associates, said: “Going forward, it would be really helpful if the CBDT is more pragmatic in their approach and not go for aggressive tax demands which threaten to derail the improving investment climate of the country.”