India: No MAT for FIIs/FPIs For Period Pprior To April 2015
The CBDT has clarified that MAT provisions will not be applicable to those FIIs /FPIs which do not have a permanent establishment in India, for the period prior to 1 April 2015. An amendment to the IT Act will be made in the winter session of Parliament and directions have been given to Income Tax Authorities to keep the pending assessment proceedings on the said issue in abeyance.
On 2 September 2015, the Central Board of Direct Taxes (CBDT) issued instructions clarifying that Minimum Alternate Tax (MAT) provisions will not be applicable to those foreign institutional investors (FIIs) / foreign portfolio investors (FPIs) which do not have a permanent establishment in India, for the period prior to 1 April 2015. Accordingly, appropriate amendments will be made in the Income Tax Act, 1961 (IT Act) and directions have been given to Income Tax Authorities to keep the pending assessment proceedings on the said issue in abeyance. These actions have been taken based on the recommendations made by a committee, chaired by Justice A.P. Shah (Committee), constituted to examine the applicability of MAT on FIIs/ FPIs.
The vexed issue of MAT on FIIs/ FPIs first came up for consideration before the Authority for Advance Rulings (AAR) in the case of Castleton Investment Limited (AAR 999 of 2012) in August 2012, which held that MAT is applicable to both domestic and foreign companies. As a result, the Income Tax Authorities started demanding MAT from foreign investors on capital gains accruing to FIIs/ FPIs from the sale of shares. The notices issued by the Income Tax Department were heavily opposed by the foreign investors and it was argued that MAT can only be levied on book profits, which they do not maintain in India.
MAT is the minimum amount of income tax that a profitable company is required to pay under the IT Act. Under Section 115JB of the IT Act, ‘book profit’ is defined as the net profit as shown in the company’s profit and loss account prepared:
(a) in accordance with the provisions of the Indian Companies Act, for ordinary companies; or
(b) in the manner prescribed by the special legislation for regulated companies (e.g., banking, insurance, power).
The above accounting requirements apply to Indian companies and foreign companies with a ‘branch office’ in India. The general view until 2012 was that, since, neither of the above apply to foreign companies, which do not have a branch in India (on the basis that such foreign companies are not required to prepare their accounts in accordance with the Indian Companies Act or other special legislation), MAT is not intended to apply to such companies. Accordingly, FIIs/ FPIs had also taken the view that MAT did not apply to them.
To appease the sentiments of foreign investors post their opposition of the department’s claims in 2012, the Government amended the MAT provisions through the Finance Act 2015. The amendment expressly provided that capital gains from the sale of Indian securities, interest, royalty or fee for technical services will be excluded from ‘book profits’ of a foreign company effective from 1 April 2015. However, there was no clarity on the applicability of MAT for the period prior to 1 April 2015. In order to seek clarity on this aspect, the Government appointed the Committee to examine all facets of the issue involved.
The Committee submitted its report on 25 August 2015, which included a detailed legislative history of MAT and the contextual interpretation of the term ‘company’ under Section 115JB of the IT Act. The Committee reached a conclusion that Section 115JB was inapplicable since FIIs/ FPIs are not governed by the regulatory regime of the Companies Act and, therefore, the obligations under Section 115JB cannot be applied independently of it. Section 115JB is an integrated code and the charging provision contained in sub-section (1) cannot be read in isolation of the computation mechanism under sub-section (2).
Furthermore, a comparison with international practices was also made and examples of some Organization for Economic Co-operation and Development (OECD) countries, such as Austria, Belgium, Hungary, Republic of Korea, Luxembourg, Slovak Republic/Slovakia and USA were looked at. The Committee found that these jurisdictions levy MAT, but do not impose this levy on foreign companies / persons unless they have a physical presence in such countries.
The Committee accordingly recommended that MAT should not be imposed on FIIs/ FPIs retrospectively. The Government accepted this recommendation and an amendment to the IT Act will be made in the winter session of Parliament. This development will go a long way in reposing faith in the fairness of tax administration of the Indian Government and provide relief to the FIIs/ FPIs.