Don't pursue MAT cases against FIIs: CBDT to field staff

The Central Board of Direct Taxes (CBDT) has issued instructions to field officers not to raise any fresh demand and keep in abeyance the notices sent to foreign institutional investors (FIIs) on minimum alternate tax (MAT) “for the time being”. This follows the government accepting the A P Shah panel’s recommendation of doing away with MAT cases against FIIs prior to April 1 this year.

The Budget has already announced there will not be any MAT on FIIs.

As such, there will not be any follow-up action on the 68 notices sent to FIIs on past MAT cases, with a combined tax dispute amount of Rs 603 crore. Also, there won’t be any further notices in this regard.

The potential tax liability of all past MAT cases on FIIs was pegged at Rs 40,000 crore by the finance ministry.

The CBDT’s directive does away with uncertainty in this regard between now and the day when amendments to the I-T Act are carried out, based on the Shah panel’s report. The government hopes to table the amendments in the winter session of Parliament.

The CBDT has asked officers to take note of the fact that it has been decided to carry out appropriate amendments to the income tax Act “so as to prescribe that MAT provisions will not be applicable to FIIs or foreign portfolio investors (FPIs) not having a place of business/permanent establishment in India for the period prior to April 1, 2015.

“Accordingly, the field authorities are advised to take into consideration the above position and keep in abeyance, for the time being, the pending assessment proceedings in cases of FIIs/FPIs ... They are further advised not to pursue the recovery of outstanding demands, if any, in such cases.”

On Tuesday, Finance Minister Arun Jaitley had said the government had accepted the recommendations of the Shah panel, set up to study the issue of MAT on FIIs, adding the income tax Act would be amended to clarify foreign funds won’t be subject to MAT.

The A P Shah panel sought the government either ask the CBDT to issue a circular that MAT wasn’t applicable to FIIs and FPIs prior to April 1 2015 or amend the relevant section of the I-T Act.

“FIIs are mostly open-ended investment funds, which permit their investors to enter and exit daily, based on the NAV (net asset value) of the fund, unanticipated tax liability (or the fear thereof) relating to previous years, which would have to be borne by the current investors, maybe a sufficient trigger for the investors to exit,” it said.

The panel said, “Normally, FIIs/FPIs do not have their own office or employees in India and carry out their decision-making activities outside India. All their dealings are through independent agents in India. Additionally, the Sebi (Securities and Exchange Board of India) regulations do not mandate their maintenance of books of accounts under schedule VI of the companies Act. Thus, FIIs/FPIs are, ordinarily, not covered under sections 591 to 594 of the companies Act, 1956.”

In its report, the Shah panel said the income of FIIs and FPIs was covered under section 115AD of the income tax Act, 1993, when they entered the Indian market.

The provision provided for tax at a concessional rate. Applying the MAT provision under section 115JB would lead to FIIs and FPIs being taxed at a higher rate without getting the benefit of  offsetting provisions and MAT credit.

Also, FIIs are not governed by the companies Act and, therefore, section 115 JB, which provides for levy of MAT on companies, is inapplicable to them. The Shah panel’s report said the aim wasn’t to cover all kinds of companies, but to limit the definition, based on context.