MY BIZ: Government signals it may accept Shah Committee recommendations
In what could turn out to be a major relief for foreign investors, an expert committee has recommended that there was no case for imposing the controversial minimum alternate tax (MAT) on foreign institutional investors (FIIs) with retrospective effect.
The A.P. Shah Committee, appointed to examine the issue of levying MAT on capital gains made by FIIs, had submitted its report to Union finance minister Arun Jaitley on July 24.
A senior official said that the panel has recommended that there was no basis for levying MAT on FIIs for the period prior to April 1, 2015. The committee saw no legal basis for the levy of 20-per cent MAT on past capital gains, the official added.
The government is considering the views of the committee to take a decision on the issue. However, there are some legal issues which have to be looked into after the submission of the report. The issue of retrospective taxation had created uncertainty among foreign portfolio investors and turned triggered volatility in stock markets. This had also adversely impacted disinvestment plans, which had to be consequently delayed.
In the 2015-16 Union Budget, Jaitley had exempted FIIs from MAT with effect from April 1. However, he could not exempt them from the tax for the period prior to this as they had already moved the advance the Authority for Advance Rulings (AAR) to get confirmation on MAT and got an adverse ruling. AAR had in 2012 ruled that even foreign companies are subject to MAT. The issue is now pending in the Supreme Court (SC). The government’s stand will be reflected in the Castleton case, which will be heard in the apex court in the last week of September.
The government has already 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. The government is keen to have a stable policy in place to attract investors as foreign exchange that comes in helps to finance the trade deficit and stabilise the rupee.
The tax department had sent notices to 68 FIIs demanding Rs 602.83 crore as MAT dues of previous years. This had raked up a big controversy with FIIs moving the SC challenging the MAT demand. MAT has been levied on all companies except those in the 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 Castleton Investment approached the AAR to get confirmation that it was not required to pay MAT on a transaction it wanted to execute. However, AAR ruled that MAT was applicable to FIIs. Subsequently, Castleton had then moved the Supreme Court on the issue. 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.
