In a welcome (and rather much awaited) development for the investor community, the Government of India has clarified that it has accepted the recommendations of the A. P. Shah Committee. According to the recommendations, the provisions of Minimum Alternate Tax (MAT) are not applicable to Foreign Portfolio Investors (FPIs)/ Foreign Institutional Investors (FIIs)for the period prior to 1 April 2015. The Government has indicated that an appropriate amendment will be carried out in the Indian tax law (ITL).
To briefly recapitulate the matter, FPIs were shocked by the levy of MAT in the assessment year 2011–12 (by draft orders) as well as by receipt of notices for reopening of past assessments. A ruling of the Authority for Advance Rulings (AAR) in October 2012 allegedly premised the concerted efforts of the Indian Revenue in pursuing the levy of MAT on FPIs. (The ruling of the AAR has been challenged by way of a special leave petition before the Supreme Court of India, which is set for a hearing on 29 September 2015.)
FPIs have been investing in India since 1993 and the levy of MAT for the first time on these FPIs in 2015, a couple of decades later, was completely unanticipated. In the context of open-ended funds where investors keep changing regularly, the issue assumed criticality as it would mean burdening current investors with past tax liabilities.
Subsequently, the Finance Act, 2015 (FA 2015) inserted a new clause to the MAT provision, effective 1 April 2015, to exclude certain income of foreign companies from the MAT regime; the exclusion of the income that FPIs are likely to earn should put them in a comfortable position. These provisions are effective from tax year 2015–16 and are prospective in nature. However, there was uncertainty on applicability of MAT to foreign companies including FPIs, in relation to the period prior to 1 April 2015.
To alleviate the concerns of FPIs, the Government appointed a Committee headed by Justice A. P. Shah to look into the applicability of MAT to FPIs for the period prior to 1 April 2015.
The Committee, after extensive deliberations, and after considering an in-depth analysis of the applicable provisions, the legislative history under the ITL, judicial precedents etc., issued a detailed report (Report) on 25 August 2015. The long-awaited Report, which is very well reasoned, recommends that the provisions of MAT should not be made applicable to FPIs for the period prior to 1 April 2015. The Committee further recommended that Government bring about an amendment to MAT provisions clarifying the complete inapplicability of MAT provisions to FPIs or that the Central Board of Direct Taxes (CBDT) issue a circular clarifying the same.
In an unprecedented and welcome development, the Finance Minister, Mr. Arun Jaitley, stated in a press conference that the Government will possibly seek to bring out necessary amendments in the next session (i.e., the winter session) of the Parliament.
It now remains to be seen if the highly anticipated amendment is tabled in the winter session of the Parliament (scheduled from November to mid-December) (again this highlights the resolve of the Government to provide complete and expeditious closure to the issue for FPIs). This will facilitate resolution of the cases for tax year 2011–12, where objections to draft orders were preferred with the Dispute Resolution Panel and whose orders are expected as early as December 2015 (i.e., nine months from filing objections). If that is not achievable, the matter may be taken up in the next Budget session, with amendments passed by enactment of the Finance Bill, 2016. In either case, there should be clarity for assessments due to be completed by March 2016 (for the tax year 2012–13).
In the interim, the CBDT has issued instructions to field authorities to take into consideration the Government’s position and keep in abeyance pending assessment proceedings involving the MAT issue and not pursue recovery of outstanding demands, if any, in such cases.
The Report of the Committee and the affirmative action of the Government should go a long way in endorsing the Government’s stated objective, of providing a transparent, consistent and stable tax regime.
While FPIs may now breathe a sigh of relief, there is no apparent respite yet as regards applicability of MAT for past years for other foreign companies, which may be strategic, long-term investors in the Indian markets, for instance investing under the FDI route. In the absence of a clear green light from the Government on inapplicability of MAT to foreign companies, which do not have a place of business/ permanent establishment in India, this would continue to remain a vexed issue. What lies ahead for other foreign companies will unravel only if the Government issues a similar clarification/ amends the law in the context of foreign companies and/ or the outcome of the Supreme Court ruling. In the case of FDI investments, since the context in which the investments are made and the actual conduct of the activities that are carried out, such investment holding entities (akin to FPIs) do not have a place of business in India and consequently, the Government should simultaneously, along with the amendments for FPIs, bring about the amendment for foreign companies to provide the requisite clarity.
There have been instances of lack of clarity in the Indian tax legislation at a conceptual level in the past years. The need of the hour is for policy-making which is clear in objective and purposely followed up with laws that are easy to understand and unambiguous to implement.
This article was also published in The Economic Times website on 7 September 2015 and includes contributions from Hasina Chhil, Tax Partner- Financial Services, EY India.