Foreign portfolio investors (FPIs) from countries such as Mauritius and Singapore, with which India has double tax avoidance agreements (DTAAs), on Wednesday got a window of possible relief from the 18.5% minimum alternate tax (MAT) demands they are facing in India with the government clarifying that treaty benefits would be available to them.
“Benefits of DTAA would be available to investors from treaty partner nations. But what those benefits are would depend on the terms of the individual treaties,” said revenue secretary Shaktikanta Das.
Now, it is for those 100 FPIs that have received MAT demands to prove they are eligible for treaty rights to escape the MAT liability. They will have to prove that eligibility either at the dispute resolution panels (DRPs) of the Income Tax department or in the courts. If any FPI from a non-treaty partner nation has received MAT demand, it would have to pay up.
Experts said India’s DTAAs with Mauritius and Singapore from where most FPIs invest in India, stipulate that capital gains tax was not taxable in India and that availability of treaty benefit would mean they would not have to pay MAT here.
Rajesh H Gandhi, Partner, Deloitte, said such funds might still have to undergo the administrative procedures of responding to the notices and proving that they are eligible for treaty benefits in the first place. “This clarification will therefore help to reduce the needless litigation for treaty based FIIs,” said.
There has been a lack of clarity within the government about whether MAT is covered by bilateral tax treaties. One view within the government has been that treaties cover only the marginal rate of corporate tax and not MAT or advance tax.
The treaty meant to avoid double taxation of the same profits or gains in two countries has in effect been operating as a means of non-taxation in either of the countries, which has now impacted FPIs for past year transactions.
Sources say FPIs have the option to go to high courts against the tax demands. “A judicial pronouncement in favour of the government cannot be undone by the government. Wherever tax is liable, the assessing officers will issue notices. Notices are being sent since the 2011 ruling,” said an official, who asked not to be named.