MAT on FIIs: Conceptual clarity versus piecemeal relief

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Updated: April 23, 2015 1:45:16 AM

FIIs have been clamouring for tax certainty in India.

The importance of foreign institutional investors (FIIs), having invested billions of dollars, to the Indian capital markets cannot be overemphasised. They have been clamouring for tax certainty in India, especially the characterisation of incomes. The finance minister, accordingly, made amendments to provide that securities held by FIIs will always be taxable as capital gains and not as business income. Contrary to the avowed intention of providing certainty in taxation, the tax authorities, taking support from the absence of specific minimum alternate tax (MAT) exclusions, have been pursuing FIIs to collect tax on MAT basis, in the open assessments.

After industry representations, the finance minister did provide clarity in the Finance Bill, 2015, to exclude capital gains from computation of book profits. As expected, the limited and half-hearted prospective MAT clarification is being regarded by the tax authorities as legislative endorsement of not only their claim to tax FIIs on MAT basis for pre-amendment years, but also going forward their intention to apply MAT tax on all the incomes other than capital gains. This will make specific tax regimes like providing taxation at 5% on gross basis for FIIs on interest incomes from certain bonds and government securities non-effective.

Strangely, the same Finance Bill is providing for extension of this special tax regime for FIIs by two years. Whilst the move to tax FIIs on MAT basis for earlier years is not on account of retrospective amendment, the decision to provide clarity on MAT only prospectively is going to hurt FIIs and may significantly impact future investments.

The need of the hour is clarity at a conceptual level as to the application of MAT to foreign companies having no place of business in India. Issues like whether the non-obstante clause in MAT can override provisions of bilateral tax treaties, and provisions of section 5(2) regarding the scope of income and taxation of non-residents having no presence in India. Non-residents are largely taxed on their incomes like royalties, FTS, interest, dividend, etc, on gross basis with a view to provide clarity and ease of taxation of their incomes. The attempt of the tax authorities to then tax them on the higher MAT basis is not only contrary to the aforesaid taxation policy, but could also be counter-productive to the portrayal of non-adversarial tax regime. Since the expression ‘company’ includes body corporates, the tax authorities may seek to apply MAT to foreign non-company entities also.

Lastly, is there any legitimate basis to discriminate between taxation of corporate FIIs and FIIs which are trusts. The real issue being the need for legitimate retrospective clarity and protection from the unintended MAT provision is unfortunately due to revenue compulsions, is being viewed as demand for retrospective relief.

Saurabh Upadhyay

The author is partner, Price Waterhouse

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