New Delhi: In a big relief to FIIs, a government-appointed committee has recommended that there was no case for imposing the controversial minimum alternate tax (MAT) on FIIs retrospectively, a suggestion that the government is said to be “favourably” considering.
The A P Shah Committee, which was appointed by the government to go into question of levy of MAT on capital gains made by foreign institutional investors (FIIs), submitted its report to the Finance Minister Arun Jaitley on July 24.
The panel, a top source said, has recommended that there was no basis for levy of MAT on FIIs for period prior to April 1, 2015.
The Committee saw no legal basis for levy of 20% MAT on past capital gains, he said adding that the government is “favourably” considering the recommendation.
While the issue had riled foreign portfolio investors, Finance Minister Arun Jaitley had in his Budget for 2015-16 exempted FIIs from the levy from April 1.
Also, the government had previously stated that FIIs can use tax treaties to reject demands on past capital gains. FIIs domiciled in countries that have signed double taxation avoidance treaties with India are exempt from these levies.
Foreign investors have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds.
“The A P Shah committee has recommended giving MAT relief to FIIs for a period prior to April 1,2015 and the government is favourably considering it,” the source said.
The source said “there are some legal issues which had to be examined” after the submission of the report. “The Shah panel had met Finance Minister separately also after that,” he said.
In its 66-page report, the Shah panel recommended relief for FIIs from paying Minimum Alternate Tax (MAT).
The content of the report was so far kept secret in view of the Castleton case that is pending in the Supreme Court and the government wanted to firm up its views on the applicability of MAT kn FIIs.
The tax department has sent notices to 68 foreign institutional investors demanding Rs 602.83 crore as MAT dues of precious years.
This had raked up a big controversy with FIIs moving the higher court challenging the MAT demand.
Jaitley in Budget 2015-16 has exempted FIIs from paying MAT with effect from April 1, 2015.
MAT has been levied on all companies except those in infrastructure and power sectors, since the late 1980s.
Historically, foreign investors have not paid this tax because it was believed that only Indian companies were subject to it. In 2010, a tax tribunal ruled that MAT was not applicable to companies that don’t have a permanent establishment in India.
In 2010, Mauritius-based investment firm Castleton Investment approached the Authority for Advance Rulings (AAR) to get confirmation that it was not required to pay MAT on a transaction it wanted to execute.
However, AAR in 2012 ruled that even foreign companies are subject to MAT.
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”.
FIIs also contend that there was inconsistency in the application of MAT as ever since it was introduced, FIIs were always exempted from it and hence, arbitrary application should be avoided.
The government’s stance will be reflected in Castleton case which comes up in the Supreme Court in the last week of September.
While Jaitley in his Budget for 2015-16 made it clear that MAT would not be applicable on FIIs from April 1, 2015, he was silent on its applicability on past transactions.
In the following weeks, a tax official issued notices to FIIs, a move that riled foreign investors and stock markets.