India Clarifies Tax Law For Foreign Portfolio Investors

The Indian Government has accepted the recommendation of the Shah Committee that the Income Tax Act 1961 be amended to clarify that minimum alternate tax (MAT) does not generally apply to foreign institutions investors (FIIs) and foreign portfolio investors (FPIs).

The Committee proposed that Section 115JB of the Income Tax Act be changed so as to provide 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 April 1, 2015. The Ministry of Finance confirmed on December 4 that an appropriate amendment to the legislation will be made.

The Government established the panel headed by judge AP Shah in an attempt to clarify whether MAT applies to foreign companies, including foreign portfolio companies, after a u-turn by the previous Government in 2012 and a new interpretation of the tax by authorities earlier this year.

Corporations whose tax payable is less than 18.5 percent of book profits can also face MAT at that rate, plus surcharges where appropriate. The tax originally applied to domestic companies or those with a permanent establishment in India. However, the tax authorities changed this position in 2012, ruling that foreign investors are indeed liable to the MAT, regardless of whether they have a permanent establishment or not.

A challenge to the new interpretation was brought by Mauritius-based investment firm Castleton Investment, which contested a decision by the Indian tax authorities to apply MAT on capital gains arising from the sale of shares, with the company arguing that this position effectively cancels benefits provided under the Indo-Mauritius tax treaty.

In the 2015/16 Budget, Finance Minister Arun Jaitley announced that foreign companies would no longer have to pay MAT from April 1, 2015. However, the tax authorities have interpreted this decision to mean that foreign companies may owe MAT for prior years, leading to a spate of demands for back taxes from foreign firms earlier this year.

According to the Ministry of Finance, 489 applications have been pending before the Authority for Advance Ruling for more than six months, some of which are said to relate to MAT issues.