Income Tax Act to be amended as House convenes
In a relief to foreign investors, the government on Tuesday said that it has decided to go by the opinion of an expert panel that said that minimum alternate tax (MAT) was never applicable to the trading gains of foreign institutional investors (FIIs/FPIs). The government added that tax officers would soon write to all the firms that have received MAT notices that the orders won’t be pursued. Whenever Parliament convenes next, the relevant Section 115JB of the Income Tax Act would be amended to stress the complete inapplicability of MAT provisions to FIIs/FPIs, finance minister Arun Jaitley told reporters here.
Though analysts welcomed the move that could soothe market sentiments, they said that a broader stance that MAT can’t be imposed on “foreign companies” would have removed the investors’ fears completely, given the conflicting views taken by the Authority of Advanced Rulings (AAR) in this regard. Justice AP Shah, who headed the three-member expert committee, said later that its mandate was limited to the issue of MAT on FIIs/FPIs, but added that its interpretation that FIIs/FPIs can’t be subjected to MAT as they don’t have a place of business/permanent establishment (PoB/PE) in India, could be extended to other foreign companies without PoB/PEs as well.
Jaitley, however, said Tuesday’s announcement covers only FIIs/FPIs and not foreign companies, which also could have trading gains in India. The minister declined to comment on the disputes surrounding MAT demands on FPIs pending in the Supreme Court and in the Bombay High Court.
But experts said amending the law would effectively pre-empt any interpretation by the judiciary that MAT was applicable on FPIs. The finance minister said that removing ambiguity in laws and bringing clarity was indeed the mandate of the legislature.
Investors had raised a hue and cry and approached courts when the tax department recently issued notices to FPIs in about 68 cases with a total tax demand of RS 602.8 crores for the period prior to April 1, 2015. For the subsequent period, FPIs are anyway not liable to pay MAT as per an amendment introduced in the law through this year’s annual budget. The decision is based on Justice A P Shah committee’s recommendation that section 115JB of the Income-tax Act may be amended to clarify that MAT provisions have never been intended to be applied on FPIs.
MAT is applied on the book profits of companies that take too much advantage of the tax breaks given in the Income Tax Act and bring their tax outgo to less than 18.5% of their book profits. In the case of these companies, the department levies 18.5% tax on the book profits, not 30% corporate tax on the low base of taxable income calculated under the tax law.
The minister also said that pending the amendment, CBDT will convey to the field formations its decision to accept the Shah panel recommendations and not to proceed with the tax demands. The decision will benefit FPIs such as Castleton Investments, National Westminster Bank and BNP Paribas facing 18.5% minimum alternate tax (MAT) demand. Castleton Investments’ dispute with the tax man is pending in the Supreme Court.
According to the Shah panel, there is no basis to apply MAT on FPIs as this levy was introduced as a tax anti-avoidance measure on resident companies. The panel said: “If Section 115JB is held applicable to FIIs/FPIs, they would be required to compile their global accounts in accordance with the Companies Act. However, such an obligation is absent in the legislative intent , as is evident from the insertion of Explanation 3 by the 2012 amendment, which failed to provide any computation mechanism for foreign companies’ book profits. Rather,the consideration of such foreign income in the company’s “book profits”would be contrary to the principle of territorial nexus,which is the basic principle for chargeability of income tax.. Evidently, therefore, the legislative intent was not to cover all kinds of companies, but to limit the definition based on context. We find that “company” has a narrower scope under Section 115JB than Section 2(17), IT Act, and is limited to entities required to file accounts in accordance with Sections 591 to 594 of the Companies Act, 1956. Thus, Section 115JB clearly does not cover an FII/FPI , and any other interpretation would render the computation n mechanism in the Section unworkable.”
“The preferred course of action to resolve the dispute is to amend section 115JB of the Income-tax Act. The government has accepted the recommendation of the Committee and we will bring the amendment in the statute in the winter session or whenever Parliament convenes next. It will be clarified that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015,” said Jaitley.
Rajesh Gandhi, Partner, Deloitte, described the government’s decision as an unprecedented move to give relief to tax payers considering the amount of potential tax demands which were being estimated. “The acceptance of the Shah Committee report by the government will be viewed very positively by the foreign investor community and can help to boost sentiment and FII investment in the stock market. FIIs have been saved from the time and efforts in litigating this issue before Courts and should be pleasantly surprised with the early resolution to the dispute,” said Gandhi.