They are in a spot as the two ways of recourse under the DTAAs — tax credits/refunds at host countries and a bilateral negotiated settlement between the authorities —can’t really come in handy
Little equipped are foreign portfolio investors (FPIs) when it comes to mitigating the potential adverse impact of the Minimum Alternate Tax (MAT) notices received from the Indian government.
They are in a tight spot because the two established ways of recourse under the Double Tax Avoidance Agreements — tax credits/refunds at host countries and a bilateral negotiated settlement between the authorities —can’t really come in handy.
In this case, the DTAAs are of practically no use because Mauritius and Singapore, host nations of 90% FPI investments in India, keep the rate of capital gains tax zero. With such relief, MAT paid in India is ineligible for refunds/credits in those countries. Since MAT is sort of anti-avoidance measure and is levied below the marginal corporate tax rate, the DTAA provision of mutual agreement procedure can’t be invoked either, official sources said. The tax notices slapped by the income-tax department come close to Rs 40,000 crore.
According to sources, MAT and advance taxes are outside the scope of tax treaties, which only cover the final or the standard corporate or income tax of entities. In fact, MAT has the nature of an anti-tax avoidance measure and globally anti-avoidance taxes are outside the scope of tax treaties, be it the diverted profits tax that the UK has recently introduced or the withholding tax on digital economy that France has imposed. “Normally, tax treaties should protect foreign companies from MAT levy, but that position may be open to challenge. But that position is not entirely free from doubt,” said Gautam Mehra, partner at PwC said.
Government sources said FPIs have the option to go to high courts against the tax demands as well as the order the Authority for Advance Rulings gave in 2011 favouring the tax department. “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.
“Globally, capital gains are usually taxed at a lower rate than business income or salaries because of its potential to attracts investments. The recent MAT demand on FPIs including retrospective demands has come as a surprise to many, which makes it difficult to sell India as an investment destination.” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
MAT at the rate of 18.5% is usually levied on companies incorporated in India the tax liability of which falls below 18.5% of their book profits on account of various tax incentives. FPIs are not incorporated as companies in India and do not maintain profit and loss accounts here. Besides, if the profits or gains from market operations in India are already distributed to their investors, they would not be able to recover any fresh tax outgo from them.