The income tax department would not attempt any coercive recovery of the minimum alternate tax (MAT) demands placed on foreign portfolio investors (FPIs) and might not pursue these demands if the AP Shah panel advised so, a senior official indicated on Tuesday.

The tax department had asked several FPIs to pay 18.5% MAT on their trading income in India, forcing some of them including Castleton Investment, National Westminster Bank and BNP Paribas L1 to take it to the court.

Although the government says that the notices have been served in only 68 cases, involving a total demand of just Rs 603 crore for the period prior to April 1, 2015, FPIs are worried that more such notices could be in the offing.

Budget FY16 exempted FPIs’ trading income from MAT, effective April 1, 2015.

Central Board of Direct Taxes (CBDT) chairman Anita Kapur said: “I cannot anticipate what the Shah panel is going to recommend. But we have this instance where the Bombay HC judgment went against us in the Shell and Vodafone cases (transfer pricing disputes involving share valuation), subsequent to which we asked officers not to do future assessments and not to agitate these further in appeals,” said Kapur.

The government’s indication is likely to be welcomed by FPIs, who have in May emerged as net sellers in the Indian capital markets (debt and equity together) for the first time in 21 months with a combined net outflow of R14,262 crore.

CBDT, the apex direct tax policymaking body, has the power to give directions to field officers giving them its interpretation of the law, explained Kapur. The Shah panel was set up on May 20.

Although the tax department cannot undo an assessing officer’s order for 2015, it can certainly tell the officer not to take it further and not to approach higher courts.

“We have also told our officers not to go for any coercive recovery in the FPI-MAT case and to grant treaty benefit wherever applicable,” added Kapur.

The tax authority has clarified these demands were raised on FPIs as the tribunal judgment that is ‘last in time’ containing an analysis of the previous judgments on the issue had more persuasive value and that the 2012 tribunal order in this case had favoured the department. Kapur said that the merit of the question whether MAT can be interpreted in a manner that it does not apply on FPI was open as of now.

However, there is the possibility of the Supreme Court, which is hearing an appeal by FPIs against the MAT demands, giving a judgment that may not agree with the findings of the Shah panel on whether FPIs need to pay MAT. “We will cross the bridge when it comes,” said Kapur.

Since the government wants the Shah panel to be totally neutral in its recommendations, it does not contain any tax department representative. “Whatever view emerges, we will take a call,” said Kapur.

Kapur also indicated that companies such as Cairn and Vodafone that have received tax demands under India’s 2012 retrospective amendments to income tax law will have to face dues recovery proceedings under domestic law while the international arbitration they have initiated to resolve the disputes are pending.

Cairn India is facing a Rs 20,495-crore tax demand for its alleged failure to withhold tax on capital gains made by its erstwhile promoter Cairn Energy in an internal reorganisation of its Indian assets in 2006-07 while Vodafone is struggling with a Rs 14,200-crore tax dispute over its purchase of Hutch Essar eight years ago.

The tax department’s view has been that there is no provision for international arbitration in a tax matter. Treaties provide for a bilateral discussion between competent tax authorities in India and in the home country of the tax payer to resolve double taxation-related disputes (mutual agreement procedure). “If they can’t (arrive at a solution,) the taxpayer goes through the normal process that is otherwise available to him,” said Kapur, referring to domestic courts. The tax department had earlier this year asked Vodafone to file a fresh return for for assessment years 2008-09 and 2009-10 for a possible reassessment of the company’s taxable income in those years.

Tax Tangle:

* Merit of MAT demands on FPIs an open issue now
* Govt to take a view based on AP Shah panel report
* I-T dept demanded 18.5% MAT from 68 FPIs trading income for R603 cr
* Although Budget FY16 removed the tax, FPIs fear more notices for the past period might be on way
* FIIs net sellers in May with net outflow of R14,262 cr
* MAT was demanded as 2012 tribunal order had persuasive value

For Updates Check Economy News; follow us on Facebook and Twitter