Economy

MAT to foreign investors: more clarity sought on P-Notes

With the government accepting the recommendation of the Justice A.P. Shah Committee on applicability of Minimum Alternative Tax (MAT) to Foreign Portfolio Investors (FPIs), one such controversial issue is over for the Government. But much-needed clarifications were awaited on issues such as taxation of Participatory Notes (P-Notes), which would help weeding out black-money entry into the country.

While accepting the recommendations, the Government has decided to make appropriate amendments to the Income-tax Act, which would clarify that MAT provisions would not be applicable to FPIs not having a place of business or permanent establishment in India, for the period prior to April 1, 2015.

Investors confidence

P-Notes are overseas derivative instruments (ODIs) issued by FPIs (earlier Foreign Institutional Investors) to overseas investors, who wish to invest in the domestic stock market without registering themselves with the Securities and Exchange Board of India (SEBI).

“The decision will help in reviving the investor confidence and ensuring clarity of taxation in the hands of the foreign investors,” says Manoj Purohit, Partner, Walker Chandiok & Co LLP.

He also says the Government’s move to bring certainty in the Indian tax regime has sent positive signals to the foreign investor community, at large, signifying that India is open for investment and are willing to address and resolve controversial issues swiftly even if it is against revenue.

MAT was intended to be applied on companies paying no or low tax even though declaring higher profits or dividend by claiming benefit of deductions and exemption is available to them.

India opened up for foreign investment more than two decades ago and MAT was first introduced in 1987. The current provisions dealing with MAT were introduced in the year 2000.

It has been a settled position that MAT is not applicable to foreign companies not having a place of business or permanent establishment in India. As also noted by the A P Shah committee, a change in this settled position in August 2014 is extremely late in the day and is against the intent of the legislation.

Last year, the controversial ruling by Authority of Advance Ruling (AAR) in case of Castleton Investment, which held that MAT is applicable to foreign companies even in absence of permanent establishment in India had triggered notices from revenue authorities to several foreign companies including FPIs.

The Finance Act, 2015 attempted to rationalise the position by providing relief from MAT to foreign companies on capital gains, royalties, interest and fees for technical services earned in India with effect from April 1, 2015.

However, the amendment was brought in prospectively with effect from financial year 2015-16 and onwards. Thus, the AAR Ruling coupled up with the prospective amendment ignited the fire and prompted the tax officers to apply MAT on foreign companies stating that MAT was also applicable for prior years. The uncertainty around taxability of FPI had a major impact on the overall FPI investment in the country including investment through P-Notes. Profits earned by P-Note holders are generally not taxed in India, however, says Mr. Purohit, the taxes, if any paid by the FPI are passed on to the P-Note holders.

The clarity on taxation would revive the investor confidence who have exited Indian markets off lately.

However, Mr. Purohit says that with respect to taxability of P-notes, industry is still awaiting clarifications on whether P-notes holders would be out of the ambit of indirect transfer rules.

As stated by the Finance Minister, Arun Jaitley, the Government wanted to bring clarity on taxation to end tax terrorism.

Considering the statement by Mr. Jaitley that “India is not a tax heaven”, the Government re-affirmed its stand to the global investors, while accepting the position, which is legally sustainable and has been the intention of the legislation.

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Printable version | Jun 2, 2020 3:05:50 PM | https://www.thehindu.com/business/Economy/mat-to-foreign-investors-more-clarity-sought-on-pnotes/article7619742.ece

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