The tax scare of foreign portfolio investors (FPIs) eased considerably on Thursday, with the government reiterating a rethink and promising to virtually let those from zero-capital-gains-tax countries like Singapore and Mauritius also to escape the hefty minimum alternate tax (MAT) notices served. Minister of state for finance Jayant Sinha said the Finance Bill will clarify this.
The change is to make the double taxation avoidance agreements (DTAAs) useful for FPIs from these low-tax jurisdictions in avoiding MAT liabilities in India.
As most FPIs don’t have a permanent establishment (PE) in India, they will have no problem in seeking the treaty cover once the promised clarification is part of law, analysts said. However, since the Authority for Advance Rulings (AAR) has taken inconsistent views on a slew of cases on whether absence of a place of business in India is a must for a foreign entity to seek the cover of bilateral DTAAs, there could be legal issues some FPIs may have to confront.
A large number of FPIs operating in India are based in Mauritius and Singapore. While the Budget 2015-16 gave MAT exemption for FPIs for future years, the finance ministry had until recently insisted that the notices served for the past few years (reportedly amounting to some Rs 40,000 crore) would be pursued.
Even with the ministry relenting on its stance, the conflicting AAR rulings could potentially pose a problem for foreign investors, especially given that some of these have reached the courts. Whether domicile status of an entity is a determinant for treaty benefit is one issue on which the AAR has been ambiguous. While the AAR ruled MAT levy is valid in the case of Castleton Investment even though it did not have a PE in India (the FPI challenged this ruling in the SC), it ruled in favour of the FPIs without PEs in many other cases. In at least one case — that of Bank of Tokyo Mitsubishi — despite the entity having branches (PE) in India, the AAR ruled that MAT is not applicable.
The AAR cited the tax treaty to rule in favour of GlaxoSmithkline despite the company having a place of business in India. However, it endorsed MAT burden of Niko Resources just because it has a place of business in India.
Rajesh Gandhi, partner, Deloitte, said that from the government’s changed position, it is rather clear that FPIs that have no place of business in India and are from treaty partner countries do not have to pay MAT. For all other foreign investors except those falling under DTAA, the only remedy left is to challenge the levy of MAT in courts.
“Clarificatory amendments to MAT rules are under consideration of the government,” Sinha told reporters on the sidelines of a climate change conference here. Revenue secretary Shaktikanta Das told FE that benefits of DTAAs would be available to investors from treaty partner nations as per the terms of respective treaties.
The income tax department recently sent notices to more than 100 entities for reassessment of their income for past years with the intention to levy MAT. MAT is typically levied on domestic companies, the tax liability of which falls below 18.5% of book profits.
Sources from the tax department said that the tax law (Section 2(14)) was amended last year to clarify that securities held by FPIs would be treated as capital assets and the income from their trading would be in the nature of only capital gain and not business income. However, that change in law was made applicable only from April 1, 2015. The government is likely to clarify that it has always been the case, which might give it the colour of a retrospective relief although the law was unclear earlier.
Sameer Gupta, tax leader for financial services, EY, said the availability of treaty benefits to FPIs was a positive announcement. “While reassessment proceedings have been initiated, it would mean that if these announcements are given effect to, MAT should not apply to treaty-protected cases,” Gupta said.