Tax department moves on MAT collection

Foreign investors informed that they will be charged on capital gains

Tax notices to foreign investors, kept in abeyance on account of the Union Budget, have come to life.

The tax department has informed foreign portfolio investors (FPIs) that proceedings to collect Minimum Alternate Tax (MAT) will begin anew. These had been put on hold, awaiting a clarification in Budget 2015-16 on whether MAT would apply to FPIs.

Though the Budget said FPIs were not to be charged, the tax department says this is with prospective effect; it isn’t applicable to past years. In the second half of last year, notices were sent in this regard. A number of foreign investors were informed that proceedings on charging MAT would continue for 2011-12.

DOWN ON THE MAT

• Foreign investors have been contacted by tax authorities
   
• Minimum alternate tax (MAT) proceedings set to continue
   
• Budget clarity on whether MAT was to apply to foreign investors was awaited
   
• Budget said MAT would not apply to capital gains
   
• Tax department says this is prospective
   
• This means MAT can still be applied to previous years
   
• Clarification said to have been sought from higher authorities if previous years are also exempt
   
• No such clarification was received
   
• Tax will now be levied
   
• Investors can move appellate bodies for relief

“Draft orders are expected in a day or two….In view of the amendment in Budget 2015, the revenue (department) seems to be taking a view that MAT is always applicable to FPIs…Overall, this will be a negative development for FPIs,” said Suresh Swamy, partner (financial services), tax and regulatory services, PwC.

“This seems to be on the understanding that the Budget clarification only pertains to 2015-16 and future years; any claim on past years will be valid. There has been no specific direction from the Central Board of Direct Taxes on whether income for the past years should also be exempt from MAT, based on the Budget proposals. So, tax authorities are planning to reinitiate their demand for MAT, as the deadline for completing assessments for 2011-12 is March 31,” said Rajesh H Gandhi, partner (tax), Deloitte Haskins & Sells.

This will also open the door to taxation for past years, with tax authorities within their rights to go back as many as seven years. Investors can appeal against the demands to either the commissioner of income tax (appeals) or the Dispute Resolution Panel.

MAT was introduced after it was found many companies paid little by way of taxes, on account of various exemptions.

This was despite the companies making large profits. Tax authorities are relying on a ruling in the case of Castleton Investments, according to which MAT is applicable to foreign entities. However, consultants say there isn’t a strong basis for this, especially as the Delhi tribunal, in September 2014, had ruled MAT was only applicable to companies that maintained books of accounts under Indian law; foreign investors don’t do so.

Before the Budget, they were asked to furnish financial statements under Indian law.

The Budget clarification said MAT wouldn’t be applicable to capital gains. Experts have said this leaves open tax demands on interest income and leads to ambiguity on whether foreign investors would have to file financial statements under Indian law, which they earlier did not.

Experts say, there is a push now on MAT because the assessment is time-bound for two years, in the normal course of things. This means for assessment year 2012-13, the department must make demands by this month; otherwise, they have to re-open old assessments.

That, however, isn’t also out of the question. Re-openings are allowed for seven years if there is new information available or if something hasn’t been assessed.

Some say this could also apply to foreign direct investment, adding there has been doubt on whether treaty rates would be applicable. Through some treaties, such as the one with Mauritius, FPIs pay zero tax. Levying at least 20 per cent MAT will make lower taxes under such treaties inapplicable.

“MAT is only a computation mechanism; it does not determine chargeability. Gains which have already been exempt due to treaty benefits should not be subject to a levy of MAT. If held otherwise by the tax department, foreign investors will have a good case in appeals. Else, capital gains tax exemption from jurisdictions such as Mauritius and Singapore will stand negated. International treaties are sacrosanct. It is unlikely that an Act that indirectly denies treaty benefits will be upheld,” said Tejesh Chitlangi, partner, IC Legal.

So far this financial year, foreign investors have been net buyers by Rs 1.1 lakh crore in the equity market and Rs 1.65 lakh crore in the debt market. They held assets under custody worth Rs.24.56 lakh crore in debt and equity securities according to the latest regulatory data (February).