New Delhi: In a major relief to foreign portfolio investors, Finance Minister Arun Jaitley Tuesday said the government has decided not to levy Minimum Alternate Tax (MAT) on capital gains made by FIIs retrospectively.
Jaitley, who has in his budget for 2015-16 exempted FIIs from payment of MAT with effect from April 1, 2015, said the government has accepted the recommendations of the Justice A P Shah panel that there was no basis for levy of such tax for the prior period as well.
The government, he said, has decided to amend the Income Tax Act to clarify the issue with regard to levy of MAT on FIIs and in the meantime CBDT field officers will be asked not to pursue cases against FIIs.
The announcement comes at a time when the capital markets are witnessing excessive volatility following the global financial turmoil that has led to FIIs pulling out funds from the emerging markets.
Jaitley said legal recourse taken by certain FIIs on being slapped with tax notice would have been time consuming and so the government decided to pursue alternative course for resolving the issue.
"We are of the considered opinion that the alternative course suggested by the Justice Shah panel, that a necessary amendment in the Income Tax Act would be required...(would be pursued). And we would be bringing out that amendment in the statute.
"Meanwhile, pending such amendment, all the field formations will be conveyed by way of circular that this is the decision of the government so they will have to hold their hands and not make or pass any orders in these matters till such time. Hopefully in the winter session of Parliament or whenever there is next session of Parliament, we will be able to bring out such an amendment expeditiously", he said.
The controversy arose after the tax department, following an order by the Authority of Advance Ruling, sent notices to 68 FIIs demanding Rs 602.83 crore as MAT dues.
When asked what happens to the notices sent to FIIs, Jaitley said the income tax law will take its own course and circular would be issued to field officers by tomorrow.
The Minister said ambiguity over MAT applicability on FIIs needed to be resolved and investor confidence could get a boost as a consequence of this.
"Confidence among investors could be a consequence of this. But having certainty and clarity in tax law, this is one of the essential function of the government. And since an ambiguity had arisen on account of conflicting opinions, that ambiguity required to be resolved," Jaitley said.
The decision to amend the Income Tax Act follows the modified recommendations of the Shah panel which were submitted to the Ministry on August 25, Jaitley said.
Through the amendment the Government will clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to April 1, 2015.
The A P Shah panel in its report has summarised that "tax "certainty should be a "desirable goal".
"FIIs are mostly open-ended investment funds, which permit their investors to enter and exit daily, based on the NAV of the fund, unanticipated tax liability (or the fear thereof) relating to previous years, which would have to be borne by the current investors, may be a sufficient trigger for the investors to exit," it said.
The sudden change in the interpretation of the applicability of Section 115JB to FIIs/FPIs thus contextualises the need for tax certainty.
In the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD.
The Shah Committee has come to the finding based upon precedent that having an 'established place of business' is different from merely carrying on a business in India.
After the report was made public, Shah said, "Authority of Advanced Rulings should be more consistent while delivering rulings".
The panel report said, "FIIs/FPIs normally do not have their own office or employees in India and carry out their decision-making activities outside India. All their dealings are through independent agents in India.
"Additionally, the SEBI Regulations do not mandate their maintenance of books of accounts under Schedule VI of the Companies Act. Thus, FIIs/FPIs are, ordinarily, not covered under Sections 591 to 594 of the Companies Act, 1956," it said.
The Shah panel in its 68 page report said income of FIIs and FPIs were covered Section 115AD of Income Tax Act that was introduced in 1993 when they entered Indian market. The provision provided for tax at a concessional rate.
Applying MAT provision under Section 115JB would lead to FIIs, FPIs being taxed at a higher rate without getting the benefit of set of provisions and MAT credit.
Also FIIs and FPIs are not governed by the regulatory regime of the Companies Act and thus Section 115 JB, that provides for levy of MAT on companies, is inapplicable to them.
The report said that the legislative intent was not to cover all kinds of companies, but to limit the definition based on context.
"We find that 'company' has a narrower scope under Section 115JB than Section 2(17), IT Act, and is limited to entities required to file accounts in accordance with Sections 591 to 594 of the Companies Act, 1956.
"Thus, Section 115JB clearly does not cover an FII/FPI, and any other interpretation would render the computation mechanism in the Section unworkable," it said.
The three-member panel suggested that the Government brings an amendment to Section 115JB of Income Tax Act, 1961, clarifying the complete inapplicability of MAT provisions on FIIs/FPIs.
Also it wanted CBDT to issue a circular clarifying the complete inapplicability of MAT provisions on FIIs/FPIs.
PwC India Partner (Tax & Regulatory) Suresh Swamy said "this is a very positive action taken by the Government. FIIs who had approached the High Court may now consider withdrawing their writ petitions filed earlier. This development will definitely cheer the investor community and will help promote India as a favourable investment destination."
The Shah Committee, which was appointed by the government to go into the question of levy of MAT on capital gains made by foreign institutional investors/foreign portfolio investors (FIIs/FPIs), submitted its report to July 24.
It later submitted a modified report on August 25 following a discussion with the officials of the Finance Ministry during which some objections were raised with regard to the line of reasoning put forth by the panel.
Jaitley said the CBDT and the Revenue Department discussed with the Shah panel their line of reasoning and then the committee decided to incorporate the responses and submitted the final draft on August 25.
The Shah panel was of the opinion that intention of the statute was against levy of MAT on FIIs, Jaitley said, adding there were some differences with regard to the line of reasoning.
"The reasoning given in the 2012 order of the AAR, however gave a contrary view. That matter is pending in the SC. How the court deals with it is a separate issue...And therefore it would be necessary to make necessary changes to that effect," he added.
Asked if the Government is giving relief to FIIs retrospectively, Jaitley said: "It is now in the view of Justic Shah panel. It is more clarificatory in nature because they have taken a view that this was always the position".
The panel said that if Section 115JB is held applicable to FII/FPIs, they would be required to compile their global accounts in accordance with the Companies Act. However, such an obligation is absent in the legislative intent.
Explaining the reasons it said: "the consideration of such foreign income in the company's 'book profits' would be contrary to the principle of territorial nexus, which is the basic principle for chargeability of income tax.
It said none of the other BRICS countries levy MAT, while some of OECD countries, like Austria, Hungary, levy MAT, but they do not levy the same on foreign companies unless they have a physical presence. "India is therefore perceived as an exception in terms of tax treatment of FII/FPIs," it said.
KPMG (India) National Head of Tax Girish Vanvari said "what is encouraging is the speed with which clarity is emerging. The icing on the cake would be if clarification would also have been provided for MAT on all foreign companies other than FPIs and FIIs".
Foreign investors have invested about USD 20 billion in Indian stocks in the past year and USD 28 billion in bonds.
