The finance ministry on Friday said it would take a view soon whether foreign portfolio investors (FPIs) are liable to pay the 18.5% minimum alternate tax (MAT) on their trading income in India or what leeway can be given in the matter, causing many investors to hope for relief from the tax demands raised.
Revenue secretary Shaktikanta Das said the government’s decision would in a large way rely on the report of the AP Shah committee that was submitted to finance minister Arun Jaitley earlier in the day. In the 66-page report, the panel holistically examined all legal aspects on the applicability of MAT on FPIs in view of conflicting Authority of Advance Ruling (AAR) pronouncements on the matter.
The government has to firm up its views quickly as the apex court is slated to hear a dispute involving Mauritius-based Castleton Investments on August 4.
So far, the tax department has raised demands in 68 cases, taking the total demand to Rs 602.8 crore for the period prior to April 1, 2015.
Jaitley appointed the three-member committee to examine the issue after investors made a hue and cry and capital inflows declined.
“The recommendations of the committee are very important… The government will definitely give due weightage to them while taking a view on the matter. We will take a view on how these tax disputes will be handled,” Das said.
He added that for the time being, the report’s contents are not being revealed. A few other issues may also be referred to the committee in due course for advice. Although the panel examined only the MAT liability of FPIs, experts said that disputes around the applicability of MAT was an issue affecting a larger community of businesses, not just investment firms. Shah said the panel considered representations from all stakeholders while finalising the report.
Rajesh H Gandhi, partner, Deloitte, said: “It is expected that the government will rely on the committee’s report when the Supreme Court hears Castleton early next month. If the report is favourable to the FPIs, the government might probably not press for levy of MAT before the Supreme Court.”
From this financial year onwards, assets of FPIs in India are treated as capital assets and their profits as capital gains, not as business income on which MAT can be claimed although trading in securities is their only business in India. However, controversial tax demands for the period up to April 1, 2015, that have been challenged in the Supreme Court as well as in the Bombay High Court had dented the department’s image recently.
To allay investor concerns, the department has already instructed field officers not to take any coercive recovery action and not to raise fresh MAT demands on FPIs. It also clarified that Investors from tax treaty partner countries (such as Mauritius) are eligible for tax relief, implying that if the treaty does not provide for taxation in India, it would be honoured. However, the tax treaties India has with countries like the UK and US, from where a large chunk of portfolio investments come, offer little relief on taxation of capital gains tax in India.
Since MAT is typically levied on domestic companies, the tax liability of which falls below 18.5% of book profits on account of various tax breaks, the tax demands raised questions from investors on whether this levy can be imposed on foreign companies that have no place of business in India and even overriding India’s tax treaties that allow taxation of capital gains only in the other nation.
Tribunal decisions were not consistent on this matter. AAR rulings cited tax treaty to rule in favour of GlaxoSmithKline despite the company having a place of business in India. However, it endorsed the MAT burden of Niko Resources just because it has a place of business in India. Castleton Investments did not get MAT exemption despite not having a permanent establishment in India as the authority took the view that it was irrelevant whether the investor was a domestic or foreign company for the purpose of MAT.
The department went ahead with tax demands as the tribunal judgment that was ‘last in time’ (in 2012) containing an analysis of the previous judgments had more persuasive value and had favoured the taxman.
While global investor bodies such as the Investment Association, Investment Company Institute, Asia Securities Industry & Financial Markets Association and the Capital Markets Tax Committee of Asia have sought to be party in the Castleton case in the Supreme Court, a few other foreign funds have approached the Bombay High Court against the tax demands. These funds include National Westminster Bank, BNP Paribas, First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund and First State Global Emerging Market Sustainability.