The levy of Minimum Alternative Tax (MAT) on Foreign Institutional Investors (FIIs), who are now called Foreign Portfolio Investors (FPIs), has been the subject of considerable interest and debate recently. Much has been debated on whether this is a legacy issue and indeed whether MAT is at all payable by a foreign company, which does not have a place of business in India. The fact does remain that MAT, as a concept, was introduced in the Indian Income-tax law much before FIIs were permitted to invest into India; and to levy tax on domestic companies, which despite paying decent (and in some cases, handsome) dividends to their shareholders, did not pay any Income-tax at all.
The present position on this can be broken into two parts –
- The controversy relating to past assessments and the reopening of assessments for earlier years and
- The position going forward on the basis that the Finance Bill, 2015 ( FB -15) is enacted as has been presented before the Parliament.
According to discussions held by the Hon. Minister of State for Finance, the Revenue Secretary and the Chairperson, Central Board of Direct Taxes with various stakeholders, for the past assessments and reassessments, the submission appears to be that the proceedings have commenced as a result of an Advance Ruling, in the case of Castleton. The matter is sub judice in that tax payer’s petition for review of the Ruling has been admitted by the Supreme Court and consequently the Executive is now unable to intervene in a process that should now be resolved by the Judiciary. The only silver lining appears to be that residents of countries with which India has a tax treaty where it has given up the right to tax capital gains (e. g., Mauritius and Singapore) will not be liable to pay MAT because of treaty override principle. The way forward for others is therefore, to litigate and subject themselves to the Indian judicial process. Thankfully, till date, the judiciary has been beyond reproach in its recent decisions, in particular, and therefore, the issue may ultimately be one of time taken and cost to be incurred.
The position for the transactions entered into on or after 1 April 2015, is a bit nuanced. What the FB15 seeks to amend in MAT provisions is the explanation where the method of computing “book profit” (the basis of the MAT levy) has been provided. The amendment proposed seeks to exclude all long-term capital gains and short-term capital gains on “on market” transactions earned by FIIs/ FPIs from the book profit. Mathematically, this may result in the FIIs/FPIs not paying MAT on their capital gains earned on transactions carried out on Indian stock exchanges, the proposal seems to accept in principle that it had not been for the exclusion, MAT would have been payable (which with due respect, does not seem to reflect the correct legal position). Moreover, other income that these FIIs could earn (for example interest) appears to be “in scope” of MAT, which again, may not be desired even by the Government. The gratifying news is that the Government (which is really proactive — never in the past have senior government officials directly engaged over a teleconference with the stakeholders to present the Government’s point of view) is seized of the issue and is looking into it. Stakeholders have been told that they can expect the Government’s position before the enactment of the FB-15.
One would like to state that the understanding of the investors in general, that MAT does not apply to foreign companies that do not have a place of business in India is based on sound interpretation of law. This has been confirmed by senior tax counsel. Based on this, and given the fact that despite MAT being on statue for more than a couple of decades there was no previous attempt of application of the provisions in the manner that these are sought to be applied currently, there clearly does exist a reason for the Government to step in and resolve as much as the uncertainty as is possible. The Hon. Finance Minister, being a legal luminary of considerable repute, may expectedly want the legacy issues to be decided by the Supreme Court. This might be a time consuming process. An examination into the possibility of an alternative may possibly, therefore, be in order. For the future, where the Government today has carte blanche to decide on the policy as well as its implementation, the world is watching with bated breath for the clarification. An appropriate clarification conveying the Government’s intention firmly and unambiguously should go a long way in ending the present doubt of tax uncertainty in foreign investors’ minds.