1. Relief for FIIs, Indian govt allays fears on tax claims topping $6.4 bn

Relief for FIIs, Indian govt allays fears on tax claims topping $6.4 bn

The development is significant given the uproar among foreign investors following around 90 tax notices slapped on FIIs by the revenue department.

By: | New Delhi | Updated: April 23, 2015 3:48 PM
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FII investment in India: Essentially the Indian authorities said the definition of permanent establishment as defined in the tax convention would help foreign investors.

The government on Wednesday assured over 1,000 foreign institutional investors (FIIs) across the United States, Hong Kong and Singapore they can avail of treaty benefits to ward off tax demands on capital gains booked over the years till March 31. The development is significant given the uproar among foreign investors following around 90 tax notices slapped on FIIs by the revenue department.

While finance minister Arun Jaitley announced in the Budget that FIIs will not be required to pay minimum alternate tax (MAT) from April 2015, the tax department sent notices to FIIs claiming tax worth $6.4 billion for past capital gains. About 41 percent of investment into the Indian capital market happens through these countries.

The ministry, led by Minister of State for Finance Jayant Sinha, along with Revenue Secretary Shaktikanta Das and CBDT Chairperson Anita Kapur told the FIIs in an international conference call they can invoke the double taxation avoidance agreement (DTAA) to escape the tax demand.

“This means that FIIs from Singapore and Mauritius will not have to pay the tax as these countries have DTAA with India, while they have zero capital gains tax,” an official told The Indian Express. “We will also clarify if minimum alternate tax (MAT) would be levied prospectively from April 1 on other incomes like interest on bond, private equity and foreign direct investment. This clarification can be expected soon,” the official added.

Essentially the Indian authorities said the definition of permanent establishment as defined in the tax convention would help foreign investors. The MAT demand is applicable only on foreign investors deemed to have a permanent establishment in India. The ministry’s clarification means those entities claiming an establishment in these jurisdictions will escape the tax net.

Meanwhile, capital market regulator, Securities & Exchange Board of India (Sebi), too, has conveyed to the revenue department its concerns on the tax demands. The regulator’s concerns are that the demands can create a negative sentiment among the FIIs. These have been conveyed to the department of economic affairs in the finance ministry, which has also supported them.

While reiterating the government’s commitment to a non-adversarial tax regime, the Centre claimed the MAT for foreign portfolio investors is a legacy issue, currently sub-judice and therefore can’t be dealt with retrospectively. The CBDT chairperson told the FIIs that assessing officers have been instructed to “pass orders very quickly” in cases where notices have been sent. “As per the existing law, it was necessary to send the notices. However, when they are taken up, they may get quashed,” the official said.

Sameer Gupta, tax leader for financial services, EY said, “This is indeed a positive announcement. While re-assessment proceedings have been initiated, it would mean that if these announcements are given effect to, MAT should not apply to treaty protected cases.”

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  1. C
    Clueless Moron
    Apr 23, 2015 at 4:50 pm
    It's a wonder that foriegn investors would have any trust or confidence in the Indian Government. Mr. Jaitley and his bungling Revenue Secretary, Mr. Das have only given numerous verbal urances relating to retrospective taxation, without walking the talk. They have chosen NOT to change the statute books to repeal the retrospective taxation law which was brought in by our exalted President, Mr. Pranab Mukherji during his tenure as FM. If I was a foreign investor, I would be extremely wary about investing my money in India, knowing that this retrospective taxation provision would be hanging like a sword over my head. Most investors who look to invest in a foreign country give weightage to a lot of factors, such as ease of doing business, market access, market size, costs of doing business, and the tax regime. For most countries, the weightage given by investors to the tax regime is 10% to 15%. However, for India, the weightage given is 40% to 45%. It speaks volumes of the confidence and trust that foreign investors have in the Indian Government.
    Reply
    1. H
      HF
      Apr 29, 2015 at 3:38 pm
      The FII MAT controversy has undermined market sentiment over the past two weeks. It has now been clarified by the Revenue Secretary that in most cases, India’s Double Taxation Avoidance Agreements will apply to FIIs affected by claims for back taxes. To read further: himalayanfund.blogspot.nl
      Reply

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