Tax treaty shield will not apply to a majority of foreign investors
FPIs are battling it out with the income-tax department, which has issued notices demanding that they pay MAT to the tune of Rs40,000 crore
New Delhi/Mumbai: Despite the government affirming that foreign portfolio investors (FPIs) can use tax treaties to fight tax demands on past capital gains, a majority of FPIs will remain under the minimum alternate tax (MAT) net because they lack the treaty protection enjoyed by their counterparts from Mauritius and Singapore.
FPIs are battling it out with the income-tax department, which has issued notices demanding that they pay MAT to the tune of Rs.40,000 crore. MAT is a tax paid by profit-making companies that do not pay corporate tax on account of incentives and exemptions. Such companies pay a fixed proportion of their book profit as MAT.
A look at the tax treaties shows that the Indian tax department can levy tax on capital gains accruing to FPIs from countries that account for almost two-thirds of the inflows coming into India, thus exposing them to MAT.
For instance, investors from the US are liable to be taxed in India under the double taxation avoidance agreement as are investors from other countries like the UK, Luxembourg, Canada and Norway.
But investors from Mauritius, Singapore and the Netherlands are exempt from being taxed in India as the country has a double taxation avoidance agreement (DTAA) with these three countries under which capital gains tax cannot be levied by India.
Jayant Sinha, minister of state for finance, said on Thursday the government is considering amending the MAT rules.
“Clarificatory amendments to MAT rules are under consideration of the government,” he said.
A senior finance ministry official said the government had clarified earlier, too, that foreign institutional investors (FIIs) will continue to get treaty benefits under the double taxation avoidance agreements India has with other countries.
The government has been engaged in talks with foreign investors over the past couple of months to clarify the government’s stand on the issue. On Wednesday, Sinha held talks with a few foreign investors while revenue secretary Shaktikanta Das spoke to foreign investors in a conference call. The government had told investors that they should approach judicial forums to get relief.
Analysts said the government is likely to clarify on the applicability of MAT vis-à-vis the DTAAs India has with other countries. But they point out that this will provide little respite, given that so far the tax notices have been mainly issued to FPIs from countries other than Mauritius, Singapore and the Netherlands.
“Most of the notices have been issued to investors who have no treaty protection. Since MAT is a local tax and India has no treaty override provision in law, the tax department has not brought investors who invest from Mauritius, Singapore and the Netherlands under the tax net,” said Gokul Chaudhri, leader, direct tax, at BMR and Associates Llp, a consulting firm.
“The government should look to resolve the issue for investors coming in from other jurisdictions also and reduce the fear and anxiety among investors. It could refer the issue to the attorney general and get a legal viewpoint on this,” he said.
Rahul Garg, leader of direct tax practice at PricewaterhouseCoopers, said the position has always been that where there is a relief under the tax treaty, India does not have any right to tax capital gains. “MAT should not be applicable in a case where the right to tax is of a foreign country as per the treaty,” he said.
In this year’s budget, finance minister Arun Jaitley had announced that capital gains accruing to FIIs will be exempt from MAT. However, this provision will only apply prospectively, the government had reiterated, despite demands from FPIs for a retrospective exemption from MAT dating back to previous years.
Jaitley had gone on to say that India is not a tax haven and every action of the tax department cannot be termed “tax terrorism”, indicating the government’s stand on the issue.
Darshan Bhatt, deputy chief investment officer at Glovista Investments Llc, which manages $1.1 billion of assets of which over $700 million are in emerging markets, said that it is an important issue in terms of the signal it will send to foreign investors.
“In terms of the recent memory, the experience of the investors goes back to the Vodafone case. There is hope that this government will be more investor-friendly,” he said in a phone interview from Jersey City, US, referring to the tax dispute with Vodafone Group Plc.
Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, said the tax issue was hurting both the markets and India’s image.
“If the government can exempt FIIs in future, why can’t they do so retrospectively? If they do so, the problem is resolved in one stroke. And if this tax was indeed due, why wasn’t the tax department levying MAT since 1994 when FIIs entered India?”, he questioned.
