As far as the financial services industry is concerned, the need for predictable tax treatment in capital markets is a common prerequisite globally. Capital markets require a higher degree of tax certainty than other industries, given that millions of transactions are conducted every day, affecting multiple participants (funds, fund managers, financial institutions, custodians, brokers, etc). To that extent, markets will only operate efficiently if every trade has a predictable result for investors and for market participants.
In this context, the levy of MAT on foreign portfolio investors (FPIs) for the past few years has become a matter of concern. Particularly for open-ended funds where investors keep changing regularly, the issue assumes criticality as it would be unfair to burden the present investors with past tax liabilities. FPIs have expressed these concerns to the government which is trying hard to assuage their concerns.
The lines between policy-making and interpretation of existing law seem to have been sharply drawn within the government. Given the developments, the executive clearly seems to be in charge of policy-making and in attempting to clarify the position prospectively, but needs to walk a tightrope in order to not impact the decision relating to the past years. The role of the judiciary appears to be specifically drawn out, namely to decide the matter which is currently sub judice, purely in the light of the position of law then prevailing.
The judicial process in India is known to be slow in terms of movement. In this regard, however, both FPIs and the government have taken steps to get the wheels of the machinery in motion. The ruling of the Authority for Advance Rulings, allegedly at the root of the issue, has been challenged by way of a special leave petition before the Supreme Court. All stakeholders have been unanimous to get the same heard expeditiously and the Supreme Court has accepted this request. As far as the judicial process is concerned, the blocks seem to be falling into place and one hopes the matter is heard and the judgement delivered expeditiously before the end of the year so that the next assessment cycle proceeds on a certain path.
The government has appointed a committee headed by Justice AP Shah to look into contentious issues including, inter alia, the applicability of MAT to FPIs. The terms of reference to the committee are not yet public but the CBDT has acknowledged that the committee is expected to decide on the issue expeditiously and has been prompt in issuing a directive to its officers in the field to hold off on any action, be it recovery of tax or proceeding with reassessment, on this issue. For the short term, FPIs’ immediate concerns seem to be put to rest.
While FPIs may still be in the process of giving thoughtful consideration to the minister of state for finance’s suggestion to implead themselves with the ongoing litigation before the Supreme Court, the immediate ‘stop’ signal from the government to the tax administration for the pending proceedings appears to be a welcome breather. This issue of the applicability of MAT to FPIs and the developments around it, however, reiterate the need for policy-making which is clear in objective and purposely followed up with drafting laws that enable the achievement of the objective and that are easy to understand and unambiguous to implement. If this is not done, the government may, on other issues, find itself in a tight corner.
But the saga continues in as much as the amendments proposed in Finance Bill, 2015—both at the time of its introduction and at the time of its debate in Parliament—still do not categorically state in so many words that foreign companies not having a presence in India are not liable to pay MAT. This may not be of significant impact as the exclusion of most of the incomes that these foreign companies are likely to earn, from the definition of ‘book profit’ on the basis of the MAT computation, should put them in a comfortable position prospectively. In many ways, with respect to the past litigation, the next path on this will unravel only post the committee recommendations being known and the outcome of the Supreme Court ruling.
The author is tax leader for Financial Services, EY. Views are personal