Union Finance Minister Arun Jaitley announced on Tuesday that the Narendra Modi government had decided to waive the controversial minimum alternate tax (MAT) on capital gains made by Foreign Institutional Investors, (FIIs) prior to April 1, 2015. The decision, to be carried out through an amendment to the Income Tax Act, is likely to come as a big relief to FIIs that pulled out more than Rs. 17,555 crore ($2.65 billion) from India during August.
No legal basis
“The Justice A.P. Shah Committee has said that there is no legal basis for levying 20 per cent MAT on past capital gains …. it is not leviable,” Mr. Jaitley told reporters.
“The Government has accepted the recommendation of the Committee … and to clarify the inapplicability of MAT to FIIs/FPIs [foreign portfolio investors] it has decided that an appropriate amendment to the Income-tax Act will be carried out in the next session of Parliament.”
Through the amendment, the government proposes to 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 01.04.2015, said a release issued later.
Pending such amendment, the Central Board of Direct Taxes will convey to the field formations the decision of the government to accept the recommendation, it said.
The A.P. Shah Committee that submitted its report to Mr. Jaitley on July 25 was appointed by the government to go into the question of levy of MAT on capital gains made by FIIs. Mr. Jaitley exempted FIIs from the levy from April 1 onwards through a provision in the Budget for 2015-16. The Income Tax department has slapped notices on 68 FIIs demanding MAT dues of Rs. 602.83 crore for previous years.
The FIIs, however, moved the High Court challenging the demand.
FIIs have argued that MAT is applicable only to domestic companies that had their base in India. By virtue of not being established in India, they should be ‘exempted.’ They have also alleged inconsistency and called for avoiding arbitrary application.
The government’s position is expected to become known in the last week of September when the Castleton case comes up in the Supreme Court.
The A.P. Shah Committee report has not been made public by the government as this case in which the Mauritius-based Castleton Investment has sought clarity on tax consequences including the imposition of MAT on foreign companies without permanent establishment in India, is pending before the Supreme Court.
So far, FIIs have not paid the MAT, which has been levied on all companies except those in infrastructure and power sectors since the late 1980s. In 2010, Castleton approached the Authority for Advance Rulings (AAR) seeking a confirmation that it was not required to pay MAT on a transaction it was planning to execute.
The AAR in 2012 ruled that even foreign companies are subject to MAT.