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On The MAT!

Published on Mon, Sep 07,2015 | 20:20, Updated at Mon, Sep 07 at 20:20Source : CNBC-TV18 

By: Subramaniam Krishnan, Partner, Financial Services – Tax, EY India

The applicability of minimum alternate tax (MAT) to foreign companies in general and foreign portfolio investors (FPIs or FIIs) in particular has recently been the subject matter of significant controversy. The genesis of the debate lies in the contradicting rulings of the Authority for Advance Rulings (AAR) and the amendments to the MAT provisions made in the Finance Act, 2015 (Budget).

The Budget amendments provide that in determining ‘book profit’ for MAT purposes certain items of income of foreign companies on which tax is payable at a rate lower than the MAT rate (18.5% presently) are to be reduced. However, the amendment was prospective in nature (effective from 1 April 2015). Given the prospective nature of the amendment, the Indian Revenue authorities (IRA) took a position that MAT provisions applied in several FII cases for financial years prior to 2015-2016 and thereby taxed otherwise tax exempt long-term capital gains and applied the MAT rate to other income. In arriving at their position, the IRA adopted several technical arguments and placed reliance on the ruling of the AAR in the case of Castleton Investment Ltd, which had concluded that MAT provisions are applicable to all foreign companies.

The IRA’s action led to widespread uncertainty and criticism from the international investor community and to allay the concerns expressed by FIIs, the Government constituted a Committee under the chairmanship of Retired Justice AP Shah to examine and recommend on the applicability of MAT on FIIs for financial years prior to 2015-2016. After significant consultations and deliberations, the Committee submitted its final report on 25 August 2015 which was released by the Government to the public on 1 September 2015.

The Committee, based on a detailed technical analysis of the law and judicial cases, recommended that MAT provisions does not apply to FIIs not having a place of business in India. The Committee, in view of its findings, recommended that the Government should amend MAT provisions to make it inapplicable to FIIs or clarify its inapplicability by way of a circular issued by the Central Board of Direct Taxes (CBDT). The Government, in a press release on 1 September 2015, accepted the Committee’s recommendation to amend the law to clarify that MAT will not be applicable to FIIs not having a place of business/ permanent establishment in India. Following this, the CBDT has issued a circular communicating the Government’s decision and accordingly advised its field authorities to keep all the pending proceedings in the case of FIIs involving the MAT issue in abeyance. The Government’s decision has been widely welcomed and the amendment to the law should hopefully put to rest the MAT controversy for FIIs.

Apart from FIIs, foreign companies investing in India under the Foreign Direct Investment route (which includes strategic investors, private equity and venture capital funds), or earning income from royalty/ fees for technical services, or interest on foreign currency loans, which may be taxable in India at rates lower than the MAT rate, could also be subject to MAT prior the Budget amendment. As the mandate to the Committee was restricted to the applicability of MAT on FIIs, the Committee did not express any opinion with regard to MAT applicability to non FIIs/ foreign companies with a permanent establishment or place of business in India.

India and Indian businesses in the public and private sector rely significantly on foreign capital/ technology to fund their growth aspirations. It is therefore critical that the tax framework for such foreign investors/ collaborators is clear, certain and consistent on all issues including MAT.

The Committee’s report evaluates several technical aspects advanced in support of applicability of MAT to all foreign companies. The conclusion of the Committee on most of the technical aspects, while in the context of FIIs, should be equally applicable to other foreign companies (non FIIs) not having a permanent establishment or place of business in India. Some of these conclusions are discussed below:

  • Applicability of MAT is an extension of the regulatory requirements of the Companies Act and not independent of it.
  • Foreign companies are required to prepare and file accounts under the Companies Act only when they establish a place of business within India, which has been judicially interpreted to mean a permanent and specific location in the country from where a company habitually and regularly carries on its business.
  • Where the foreign company is not required to prepare and file accounts under the Companies Act, the computational mechanism under the MAT provisions fails and therefore the charging provision becomes inapplicable.
  • The Budget amendment is clarificatory in nature. Therefore, its prospective nature cannot be used to apply a different interpretation for past years.
  • Regardless of the interpretation given to the MAT provisions, the provisions of an applicable tax treaty that exempts income or provides a lower rate would override the MAT provisions. In this regard, the Committee concluded that the AAR’s conclusion in Castleton’s case is incorrect.

Given that the press release and the CBDT circular does not address the MAT concern for non FIIs, the focus will now turn to the Castleton case (Castleton invested in India under the Foreign Direct Investor route), whose Special Leave Petition before the Supreme Court of India challenging the AAR ruling is likely to be heard later this month. One would hope that the Government, having accepted the Committee’s recommendations, would take a consistent position for non FIIs as well and support Castleton’s position on non applicability of MAT in the course of the hearings before the Supreme Court. Irrespective of the outcome of the Castleton’s case, the Government, while making amendments to the tax law should provide clarity on non applicability of MAT provisions to not only FIIs but all foreign companies earning items of income on which tax is payable at a rate lower than the MAT rate (gains, interest, royalty, fees for technical services).

Foreign investment by strategic investors, private equity and venture capital funds represent a significant source of primary long term capital that is critical for India’s aspiration of achieving inclusive and sustainable growth in the 21st century. A broad based all encompassing clarification on MAT will send a strong signal to the international community that India is committed to ushering in a non-adversarial tax regime.

(Views expressed are personal)


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