Much has already been said and written about the MAT controversy—on whether FIIs, or FPIs, as they are now labelled, are liable for MAT. The FPIs strongly believe that MAT provisions do not apply to them. The government, on the other hand, has equally strongly asserted that MAT must be levied on FPIs because that is what the law provides, as interpreted by the Authority for Advance Rulings, a quasi-judicial body. In order to unravel this controversy, it may be helpful to set out the law and the context.

The Indian markets were first opened to non-resident portfolio investors (i.e. FPIs) in 1992. The government put in place a taxation framework for FPIs that was designed to encourage such investments. FPIs have filed tax returns regularly over this entire period, offering their income to tax at rates prescribed for FPIs. A number of these tax returns have been audited by the Indian revenue authorities and no MAT liability has ever been assessed until the recent controversy erupted.

MAT provisions were first introduced in 1988. At that stage, the government clarified that these were intended to apply to domestic widely held companies. MAT provisions in their current form were introduced in the Income Tax Act in 1996; MAT was leviable on 30% of the book profits of companies, and the book profit was to be calculated in accordance with the provisions of the Companies Act. The government helpfully clarified that the effective tax rate would work out to 12% of the book profits. Then, Indian companies were taxable at 40% while foreign companies were taxable at 55%. Simple maths would establish that the 12% effective rate was 40% tax on domestic companies applied to 30% of their book profits. The effective rate of tax would have been 16.5% if it were to apply to foreign companies. This maths was confirmed in subsequent years as well, and in 2002, the government expressly clarified that MAT provisions apply to domestic companies. Foreign investors are not required to draw up accounts in accordance with the Companies Act. Given this context, foreign investors proceeded on the basis that MAT did not apply to them.

Along the way, foreign companies sought rulings from the Authority for Advance Rulings in only 5 reported cases.

The first ruling was issued as far back as 1998 where the AAR held that MAT should apply to the applicant since it had a place of business in India and as such, was required to maintain accounts in accordance with the Indian Companies Act. However, in 2010, the AAR ruled in two cases that MAT should not apply to the applicants since they did not have any business presence in India and merely held investments in Indian securities. In August 2012, however, on identical facts, the AAR reversed its decision and held that MAT should apply to the applicant
even though it was only an investment holding company with no business presence in India. None
of these rulings involves an FPI!

The government would have us believe that the tax is legitimately due and foreign investors cannot expect India to forgo such tax claims; that its hands are tied because a quasi-judicial authority has ruled in the case of an FPI that MAT should apply; that the FPIs are seeking favours and retrospective amendments to laws which goes against the basic tenets of rule of law that all taxpayers are otherwise seeking and which the government is committed to delivering; that while the government is committed to mitigating “tax terrorism”, enforcing “legitimate” tax dues cannot be equated with tax terrorism.

This defence is disingenuous. It is clear that MAT provisions were intended to apply only to domestic companies who are obliged to prepare accounts in accordance with the Companies Act. The one ruling that the government hangs its case on was not issued in the case of an FPI. In any event, such rulings are only binding for the taxpayer and the revenue in the context of the taxpayer, and certainly do not “tie” the government’s hands. Further, it is not as if there is a preponderance of judicial observations that hold MAT to be applicable for foreign companies. How does this make MAT claims on FPIs legitimate dues owing to the government? Is it unreasonable for investors to proceed on the basis that MAT does not apply to them when these provisions have not been applied to them for over 19 years?

And even if one were to concede that the doctrine of promissory estoppel does not apply to income tax matters, how does one describe a situation where tax claims are asserted after a lapse of almost two decades? If “tax terrorism” is defined as a situation where tax laws are not stable and predictable, then the current actions of the government perpetuate, rather than address the malaise.

The author is  chief mentor & partner, BMR & Associates LLP. Views are personal

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