While setting up of the AP Shah committee is welcome, it will all depend on the stand the govt takes at the SC
An error becomes a mistake if one refuses to correct it. At some point, the government and the tax administration appeared to perpetuate the minimum alternate tax (MAT ) on FPIs issue, but recent actions indicate the government’s commitment to get this resolved, eventually.
In line with its intent to provide clarity on the taxation of FPIs, the Union government, last week, constituted a three-member high level committee (HLC), headed by retired judge AP Shah, with Ashok Lahiri, an eminent economist, and Girish Ahuja, a distinguished professor, as the other members.
The HLC will examine all the legal provisions, judicial/quasi-judicial pronouncements and other relevant aspects. In the process, it will interact with various stakeholders including officers from Indian revenue authorities. A focused group discussion between the members, FPIs, industry bodies, tax consultants and Revenue will ensure that there is active engagement and a common forum available to all stakeholders to voice their concerns. The Tax Administration and Reform Commission (TARC) followed a somewhat similar approach.
To recap, MAT is a tax levied on companies, at the rate of 18.5% of the book profits in the case that the tax payable by the company, as per the normal provisions of the income-tax law, is lower than 18.5% of the book profits.
The tax clamour started after the taxman started issuing notices to FPIs for the levy of MAT on capital gains earned by them, citing a 2012 order by the Authority for Advance Rulings in the case of Castleton Investment Ltd.
FPIs opposed these notices, arguing that MAT can be levied on companies which have a presence in India and maintain books of account in India. FPIs do not have any form of presence in India; they operate from their respective home countries, and there is no requirement under law for them to maintain books of account in India and/or draw a profit-and-loss account in India.
After industry representations, the finance minister did provide clarity in the Finance Bill, 2015, to exclude capital gains from computation of book profits. After further representations, at the time of passing of the Finance Bill 2015, the finance minister further excluded interest income, royalty, and technical fees from the MAT prospectively.
However, in line with the stated position of the government that the issue is sub-judice, the past years were left open. FPIs moved the high court, challenging the levy of MAT for past years.
Meanwhile, upon the government’s plea, the Supreme Court has agreed to grant an early hearing of the Castleton case. The case will come up for hearing on August 5. It will be interesting to watch how the recommendations of the HLC influence the government’s stand on Castleton before the Supreme Court. The question is whether it will put up a spirited argument for the levy of MAT on foreign companies or it will accept the HLC’s recommendation.
To placate FPIs, the government also instructed the tax officers not to take any coercive action on outstanding tax demands and/or raise any fresh demands and stay all assessment proceedings as well, unless they are getting time-barred.
Concurrently, it has been reported that the dispute resolution panel (DRP) of Revenue has recently issued notices to the FPIs, asking them to make additional submissions within the next couple of weeks. However, it appears that these notices have just been issued in the normal course and the DRP will wait for further directions from the Board before proceeding with the hearing. Obviously, the DRP would not want to create further confusion on the issue.
With India’s expected growth, it has been a preferred investment destination for FPIs. The government clearly recognises the significance of foreign flows for India. FPIs have always been given a red carpet welcome. The above actions of the government evidently indicate that it does not intend to pull the “mat” from their feet. Industry therefore eagerly awaits the report of the HLC and will anxiously watch the stance of the government before the Supreme Court.
Co-authored with Deepa Purswani (manager) and Shivam Tiwari (associate), PwC India
The author is partner, PwC India. Views are personal