FPIs join forces to challenge MAT

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Mumbai | Published: April 30, 2015 1:31:07 AM

More foreign investors may file writ petitions in Bombay HC, say legal experts; decision expected soon

An increasing number of foreign portfolio investors (FPI) are exploring legal options against tax notices served by the Income Tax (IT) Authorities demanding retrospective tax on  capital gains earned in the Indian securities market.

Legal and tax experts FE spoke to said that another dozen or two dozen funds may file their petitions in the near future, challenging the jurisdiction of the tax authorities to levy MAT. This is in addition to the five FPIs who are reportedly planning to file their writ petition in the Bombay High Court against the IT department.

A decision will be taken soon  depending on the facts of each case, as FPIs have a 30-day deadline from the date of issue of notices, experts said.

“Industry players are actively exploring all options available. Other than the regular appellate proceedings against the draft/final orders, FPIs who have received orders/reassessment notices could consider challenging the legality of these before the HC by way of a writ petition,” said Sameer Gupta, partner and tax leader – financial services, EY India.

In addition to a writ petition, experts also suggested alternative remedies given the huge cost element involved in filing a writ.

“There is an alternate remedy available which is the appeal process. FPIs are mostly opting for the appeal process based on the outcome of past cases (Timken, Praxair, and Bank of Tokyo-Mitsubishi). There have been cases where courts have rejected a writ on the ground that an alternate remedy in the form of appeal was available,” said Rajesh Gandhi, partner – Tax, Deloitte Haskins & Sells.

In March-end and early-April, IT authorities issued 68  notices to FPIs seeking payment of R602.83 crore towards MAT. Moreover, notices were sen to about 200-300 FPIs last fiscal for assessment year 2008, 2009, 2010 and beyond. The notices meant that FPIs would have to pay tax at an effective rate of 20% on business income or book profit with retrospective effect, replacing the capital gains tax framework.

The tax department had also asked FPIs to furnish their profit and loss statements, balance sheets, and other relevant documents which are otherwise submitted by companies based in India. FPIs are not liable to maintain books of accounts in India, according to various regulations.

The issue further created confusion for FPIs after the finance minister Arun Jaitley said the government will press ahead with R40,000 crore tax demand on foreign institutional investors as FIIs lost a case against levy of tax on capital gains they made.

The Central Board of Direct Taxes (CBDT) then said it will settle all MAT-related matters of FIIs (foreign institutional investors) coming under the ambit of Double Taxation Avoidance Agreements within a month of filing of claims. The move is aimed at quickly resolving the controversial tax issue facing FPIs.

As the issue has generated a lot of controversy, finance minister Arun Jaitley is expected to come out with some clarification at the time of his reply to the debate on the Finance Bill in parliament on Thursday .

Under the current regime, foreign institutions are not required to pay any tax on long-term capital gains (gains from investments exceeding one year). Institutions are liable to pay short-term capital gains tax (tax on investment less than one year) at 15%.

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