After five foreign funds moved the Bombay High Court late on Wednesday seeking directions “to withdraw, revoke, and cancel the order” against retrospective tax demands by the income tax department, another five investors are understood to have done so on Thursday, legal and tax experts told FE. Several more could take similar action before the court hears the matter on May 6.
The IT department has so far issued 68 notices to foreign portfolio investors demanding R602.83 crore towards minimum alternate tax. The tax authorities have also asked FPIs to furnish their P&L statements, balance sheets and other relevant documents otherwise submitted by companies based in India. The notices mean that FPIs would have to pay tax at an effective rate of 20% on business income or ‘book profit’ with retrospective effect, replacing the capital gains tax framework.
Among the foreign investors are Luxembourg-based BNP Paribas L1 and London-based National Westminster Bank, which filed their petitions on April 29, 2015, according to information available with the court’s registry department.
The petition filed by National Westminster Bank and reviewed by the Financial Express stated that MAT did not apply to FPIs.
“…because provision of Section 115JB are on their plain language applicable only to domestic companies and given the fact that the petitioner in a foreign company which has no place of business in India, the imposition of MAT on the petitioner is an illegal extension of a law meant to apply to domestic assesses to book profits that are in financial statements outside India — thereby imparting extra territorial application to domestic tax law — and that too in a manner contrary to its plain language”, stated the writ petition.
Finance minister Arun Jaitley has maintained the government will press ahead with Rs 40,000 crore of tax demands on foreign institutional investors (FIIs) for capital gains made during previous years since they have been made in accordance with a law brought by the previous government and upheld by the Authority for Advance Rulings. The government has, however, waived MAT on capital gains from 2015-16.
National Westminster Bank and BNP Paribas are being represented by law firm Khaitan & Co and the combined tax demand of these FPIs is understood to be close to Rs 50 crore. While FPIs based in Singapore and Mauritius can avail of treaty benefits to ward off tax demands, treaties with UK and Luxembourg do not exempt them from capital gains.
FPIs claim they have no place of business in India and are not required to maintain books of account nor liable to pay any tax on their capital gains earned from the Indian securities markets. The petition read: “…because holding that the provision of the Section 115 JB apply to the petitioner defeats the obvious objective of the law to exempt FIIs from the regular tax on such income thereby to promote investments in Indian capital markets by FIIs”.
Under the current regime, foreign institutions are not required to pay any tax on long-term capital gains (gains from investments exceeding one year). Institutions are liable to pay short-term capital gains tax (tax on investment less than one year) at 15%.
FPIs encompass all FIIs, their sub-accounts and qualified foreign investors under a new regime that came into force on June 1, 2014. Securities and Exchange Board of India data show there are more than 8,200 FPIs registered in Indian capital markets.
The Central Board of Direct Taxes then said it will settle all MAT-related matters of FIIs coming under the ambit of double taxation avoidance agreements within a month of filing of claims. The move is aimed at quickly resolving the controversial tax issue facing FPIs.
— With inputs from Aamir Khan, Indian Express
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