Fresh MAT demands to depend on outcome of litigation

FIIs to move Dispute Resolution Panel and Commissioner of Income Tax (Appeals) against tax notices by CBDT

The Central Board of Direct Taxes (CBDT) has sent final assessment orders on cumulative minimum alternate tax (MAT) to foreign institutional investors (FII). However, most of it would end up in litigation, sources said.

According to people in the know, the FIIs have received draft assessment orders as well as final orders. Experts said the cumulative MAT demand would run into Rs 30,000-40,000 crore.

FII’s legal teams as well as consultants representing them have already started moving relevant authorities to contest the tax demand.

“In case of draft order, we are moving the Dispute Resolution Panel (DRP) and for final demand, we are moving Commissioner of Income Tax (appeals) (CIT),” said a source.

The tax authorities are understood to be waiting to see how these cases are dealt with by the judicial system before sending out more notices.

“We will wait for the judgment by DRP or CIT before we make any more tax demands. The matter is subjudice; it won’t brood well to make any stand now,” said a tax official.

The taxmen have one ruling reaffirming their position on tax demand where judicial system ruled against the assessee, Castleton Investments. The Authority of Advance Ruling (AAR) ruled that even a foreign company is covered under the provision of MAT under the Income Tax Act.

However, an order by the Delhi Tribunal in September last year stated MAT could be applicable to only those companies that maintain book of accounts. According to existing norms, FIIs are not required to maintain book of accounts but should pay capital gains.

In the absence of any clarification from the finance ministry on whether tax demands can be made for previous years or not, the taxmen would be within their rights to open previous cases.

The Budget clarification said MAT would not be applicable to capital gains. According to legal experts, this leaves room for interpretation that tax demands can be made on interest income.

“In the absence of any clarification, we may in future be required to maintain profit and loss account that we were not doing earlier,” said a foreign investor on condition of anonymity.

According to Hong Kong-based Asia Securities Industry and Financial Markets Association (ASIFMA), London-headquartered ICI Global, European Fund and Asset Management Association, and the Federation of Indian Chambers of Commerce and Industry have raised alarm over attempts by the tax department to levy MAT on foreign investors' profits.