Tax department issues notices to 100 FPIs; more foreign funds to follow suit
Foreign portfolio investors’ (FPIs) relief over minimum alternate tax (MAT) exemption appears to be short-lived and institutions are instead preparing to fight a legal battle against the government. This is after the Income Tax department has issued notices to about 100 FPIs and more foreign funds are expected to follow suit.
Tax and legal experts say the uncertainty surrounding applicability of MAT will adversely impact India’s image, which showed some signs of improvement due to better tax policies in many controversial areas.
Sunil Jain, partner, J Sagar Associates said the MAT issue is at variance with what was announced in the Budget and further complicates the matter. “Obviously there will be litigation and FPIs have started preparing for a protracted legal battle. The government may have a technical argument or a case but it needs to adopts a consistent tax principle across all tax years on the issue given that clarity for all future years has been provided in the recent union Budget,” Jain said.
On Monday, Finance Minister Arun Jaitley said that legitimate tax demand cannot be considered “tax terrorism” because India is not a tax haven, further stating that taxes which are payable must be paid.
This is in sharp contrast to Jaitley’s Budget speech in February that proposed to scrap MAT on capital gains made by foreign institutions.
UR Bhat of Dalton Capital said it is illogical for FPIs to pay MAT if they have no permanent establishment in India. Under the rule, foreigners are not required to maintain books of account as these entities have no permanent establishment in India. It should also mean that these entities have no ‘book profits’ on business income in India and should therefore be not liable to pay MAT.
“It may be that the notices are sent to non-Mauritius FPIs as India has bilateral tax treaties with countries like Mauritius, Singapore, and the Netherlands. There is however, a complete lack of clarity on taxation of FPIs in India and such notices relating to retrospective taxation will only show India in negative light from an investment stand-point, leading to uncertainty and long drawn litigation. It is best that a consultation process be started by the finance ministry to address these long standing issues,” said Bhat, who advises many foreign investors on their investments in India.
Nearly 100 foreign funds have been asked to cough up an estimated $5-6 billion for ‘untaxed gains’ made by them in the Indian markets over the past years. The IT department has imposed 20% MAT on capital gains made by foreign institutions.
A section of the industry argue that tax regime is clear and those FPIs not comfortable with the tax structure in India should avoid investing in India. “The capital gains regime in India is quite fair for the complexities of a big nation. The law is quite clear on taxation. A moderate tax on securities held up to one year and none beyond that. A long term investor has nothing more to wish and speculators can cry as much as they want. If the question is whether it will be treated as business income, one should not trade that much. Seed, let it grow and reap,” said Abhijit Sarkar, fund manager, Hamon Investment Group which specialises in Asian equity mandates.