FII- MAT tussle stuck at 'place of business' roadblock

Consultation with AP Shah panel sought jurisdictions' comparison, definition of place of business

The tussle of Minimum Alternate Tax (MAT) applicability on Foreign Institutional Investors (FIIs) is now stuck on how to define place of business.

By sources, the tax department is saying that they have not just relied on the Castleton verdict but on the criteria of place of business.

Amidst the consultation with the AP Shah Committee, the FIIs have been sent notices stating why the MAT demand has been applied on these investors.

"The FIIs have been asked to prove that they do not have a place of business in India. If they cannot prove that they do not have a place of business in India then they need to maintain book of accounts and pay MAT," said a source privy to the developments.

The government had constituted a three member committee to decide on the legality and constitutionality of MAT on FIIs. The AP Shah Committee is currently holding consultations with the various stakeholders as well as the income tax department. The last consultation would happen on the 6 July after which the Shah Committee deliberates and submits its report to the finance ministry.

The Shah Committee during the present deliberation has sought from the stakeholders a comparative study of the various jurisdictions whether there are some nations where MAT is applicable on FIIs.

Many countries have a MAT regime in their tax laws; however, they do not apply it to the foreign investors. For example, Taiwan, US and Korea have a MAT regime, but it is not applicable to foreign investors without a PE in that country.

Proving that the FIIs do not have a place of business in India is proving to be a task for the FIIs as there is no clear definition of place of business available either in the Companies Act or Income Tax Act.

Under the Companies Act, the requirement of preparing books of accounts is applicable to a foreign company that has established a place of business in India and thus under the same act they would be liable to pay MAT.

"How do we define place of business. Is mere physical presence required for defining a place of business or there could be any other way to describe it," said an industry participant.

Another participant says that MAT provision, if at all applicable to a foreign company, should be restricted to the companies that have established a place of business in India like a branch.

The controversy arose when the Indian tax department sent MAT notices to FIIs with a total demand of Rs 602 crore. The budget addressed the issue and stated that MAT would not be applicable on FIIs but this was prospective in nature leading to a tax demand for previous years.
FII-MAT AT A GLANCE

• FIIs need to prove that they do not have a place of business in India
• FIIs have been asked for a comparative study of various jurisdictions and if MAT on FII is applicable in any
• AP Shah Committee to continue deliberations with industry bodies and the last deliberation is with income tax department
• FIIs find it difficult to prove no place of business in absence of clear definition under companies act and income tax act