Govt likely to agree; big relief to investors
A high-level panel that reviewed the legal aspects of minimum alternate tax (MAT) applicability on foreign portfolio investors (FPIs) recommended against such levy on the trading income of these investors for the period before April 2015 and the government was favourably inclined to go by the advice, a senior official said on Friday.
If the governments adopts this stance, it would give relief to FPIs such as Castleton Investments, National Westminster Bank and BNP Paribas that are facing MAT demands on their trading income in India.
The government could make its position clear to the Supreme Court, which is hearing a petition filed against the levy by Castleton, sources said, although the court would have the final say in the matter. The apex court is expected to hear the Castleton case in the last week of September.
The justice AP Shah committee said, according to the official quoted above, that the trading income earned by FPIs in India was not taxable as business income under the law. “The government is favourably considering the proposal,” the official said.
The tax department, in the final months of last fiscal, issued MAT demands on FPIs in as many as 68 cases, for periods prior to April 1, 2015. The total tax demand, at the rate of 18.5%, amounted to Rs 602.8 crore. With these notices creating a flutter among the investor community, the government later relented and said that from this financial year onwards, assets of FPIs in India would be treated as capital assets and their profits as capital gains and not as business income on which MAT applies.
The Shah panel, which submitted its report to finance minister Arun Jaitley on July 24, sources said, recommended that there was no basis to apply MAT on FPIs as this levy was introduced as a tax anti-avoidance measure on resident companies, which could keep their tax liability below 18.5% of book profits on account of various tax breaks.
Rajesh H Gandhi, partner, Deloitte in India, said the government’s position before the Supreme Court when the Castleton case comes up for hearing could be that FPIs should not be liable to MAT. “This will likely result in the Supreme Court reversing the order of the Authority for Advance Ruling (that MAT is applicable on the firm’s trading income for the relevant period),” he said.
Some experts said the apex court might accept the government’s changed position as the true interpretation of the tax law for the period the tax demands were raised, given the view expressed by the panel headed by a retired judge. They, however, pointed out that interpretation of law is the sole prerogative of the apex court and of high courts, not of any government-appointed committee. Jaitley had set up the Shah panel in view of conflicting AAR rulings on the matter.
To soothe investors’ nerves, the income tax department had earlier instructed field officers not to take any coercive recovery action and not to raise fresh MAT demands on FPIs. It had also clarified that investors from tax treaty partner countries (such as Mauritius) were eligible for tax relief, implying that if the treaty does not provide for taxation in India, it would be honoured. However, the tax treaties India has with countries like the UK and US, from where a large chunk of portfolio investments comes, offer little relief on taxation of capital gains tax in India.
MAT on FPIs and non-resident companies that have no place of business (permanent establishment in tax parlance) in India was contested by taxpayers at AAR, which gave conflicting judgments. Since the order that was ‘last in time’ (2012), which had analysed all previous judgments, was in favour of the tax department, it went ahead with tax claims on other firms too.
Foreign investors have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds.
Girish Vanvari, national head of tax, KPMG in India, said that not levying MAT on FPIs prior for the past period would boost foreign investments into the country. “However, the exuberance could be higher if MAT is removed for all foreign companies (whether FPIs or not),” he added. The Shah panel’s recommendations are limited to FPIs and do not cover non-resident companies that may have trading income from India.