Budget 2018: The Finance Act, 2016, had said minimum alternate tax (MAT) won’t apply to foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) as they normally won’t have a place of business in India and given the decision retrospective effect from 2001. Budget 2018-19 has gone a step further: It clarified that foreign companies in specified infrastructure sectors, which operate in the country with permanent establishment (PE) — read branch offices — but are under Section 44BB, given the facility of paying tax on a presumptive income basis won’t have to dread MAT.
This would mean that oil drillers like Shclumberger, Halliburton and Dolphin Drilling, shipping lines like MSC Mediterranean Shipping and Mitsui OSK Lines, or airlines like British Airways won’t have any MAT liability in India if they had paid tax at 5% of the total receipts from their operations here. Malaysian and other Southeast Asian highway developers that have exposure to India’s highway projects will also benefit from the MAT waiver. Under sub-section (1) of Section 115JB of the Income Tax Act, if tax payable on the total income of a company is less than 18.5% of its book profit, the book profit shall be deemed to be its total income and MAT has to be paid on it at 18.5%.
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Invoking this proviso, tax authorities have issued notices to Section 44BB firms also, leading to some disputes and litigation. The issue has now been settled by the latest Budget. With retrospective effect from April 1, 2001, no MAT is applicable on these companies; they need to pay only the 5% presumptive tax. Tax analysts, however, said that the latest decision won’t lead to any major refunds by the governments as there are few instances where Section 44B firms have paid MAT. The Finance Act, 2015, had said that MAT will not apply on FIIs/FPIs; subsequently, in September 2015, finance minister Arun Jaitley announced the government’s decision not to pursue the MAT notices issued to a clutch of FIIs/FPIs for the period prior to assessment year 2016-17, giving a great relief to these foreign investors. The Finance Act, 2016, had extended the MAT exemption to several categories of foreign firms without PE in India, again with retrospective effect from 2001. Justice AP Shah, who headed the three-member expert committee on the issue or MAT on FIIs/FPIs, had categorically said that MAT was never meant to be applicable on these investors, which don’t have a place of business/permanent establishment (PoB/PE) in India.
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It added that the same policy could be extended to other foreign companies without PoB/PEs as well. Analysts had then said that a broader stance that MAT can’t be imposed on “foreign companies” would have removed investors’ fears completely. The latest move is a big step in that direction. Commenting on the clarification, Shailesh Kumar, director, taxation, Nangia & Co, said, “The Budget proposal is an abundant clarification that says that companies under Section 44BB do not have to pay taxes under MAT. In my experience, assessing officers haven’t raised tax demand under MAT for most such companies. There could be at best 1% such firms under litigation due to demands raised under MAT.” “In my view, most companies under this section wouldn’t have paid taxes under MAT, so I don’t see any major outgo from government coffers in terms of refunds,” said Samir Kanabar, partner at EY.