Shah panel removes MAT cloud over FIIs

FinMin is 'favourably considering' relief for the period before April 1, 2015

In a huge relief for foreign institutional investors (FIIs), the government-constituted A P Shah committee has recommended they be granted relief on Minimum Alternate Tax (MAT) for the period before April 1, 2015.

“The committee has recommended giving relief to FIIs on MAT prior to April 1, 2015. The government is favourably considering the Shah panel’s recommendations. Finance Minister Arun Jaitley held talks with the Shah panel members on Thursday,” said a senior official.

In 2012, the Advance Authority Ruling (AAR), Delhi, directed Castleton to pay MAT in India on its book profits, when the company transferred shares from a Mauritius entity to one in Singapore.

RELIEF FOR FIIs

• AP Shah panel has recommended that FIIs be granted relief on MAT
• Government is favourably considering the recommendations
• Government would consider the Shah panel report when the Castleton case is heard in the Supreme Court
• 95% of FIIs which had received MAT demand notices had approached the dispute resolution panel or high courts

The income tax department had sent notices to 68 FIIs, demanding Rs 602 crore as MAT dues for earlier years.

To resolve the issue, the government formed a panel headed by Law Commission Chairman A P Shah. The panel also had former chief economic advisor Ashok Lahiri and chartered accountant Girish Ahuja.

The crux of the issue was whether the government would waive MAT prior to April. From the current financial year, MAT is anyway not applicable to foreign portfolio investors.

Industry has argued the provisions of MAT under the income tax Act are aimed at taxing companies that are required to prepare their profit-and-loss accounts according to the Companies Act. Additionally, foreign investors do not have a fixed place of business in India and, therefore, don’t have to maintain books of account according to the Companies Act.

Suresh Swamy, partner, PWC, said Friday’s clarification effectively rendered the FII-MAT debate closed. “From the perspective of FIIs, the bigger issue gets off the table on the liability of MAT and from a foreign corporate perspective, it is only the Castleton case that has so far been embroiled in the MAT liability issue. If the government accepts the position, it will nip the issue in the bud,” he said.

“The recommendations of the Shah committee are indeed welcome. It is expected the government will accept the committee’s suggestions and stop demanding MAT from FPIs for the period before April 1 2015. It is also expected when the Castleton case comes up for hearing before the Supreme Court, the government’s position will be MAT shouldn’t be liable on FPIs. This will likely result in the Supreme Court reversing the ruling of the AAR,” said Rajesh Gandhi, partner, Deloitte Haskin & Sells.

About 95 per cent of FIIs who had received MAT notices from the income tax department had approached the dispute resolution panel (DRP) for relief without prejudice towards their high court applications; 10 FIIs had approached the Bombay High Court, challenging the income tax department’s stand on MAT demand.

If the government accepts the views of the Shah panel, the DRPs would hear the cases and either dispose of or suggest to the assessing officer to do away with the additional demand.

“Most aggrieved parties that have challenged the income tax demand in DRPs and high courts might withdraw their applications, as the dispute no longer exists,” Swamy said.

Girish Vanvari, national head of tax, KPMG, said this was a “sentiment booster” for FIIs, adding the exuberance could have been higher if all foreign companies were exempted from MAT. “If the position of the A P Shah panel is accepted, it would lead to an amendment in the income tax law and that would be another step for the government to show it means business and is willing to quickly bring in certainty on critical issues. But the relief would not be complete if the A P Shah panel hadn’t recommended relief for companies, and only for FIIs,” said Vanvari.

According to industry sources, some foreign companies had received income tax notices on MAT demand, but these were put on hold pending a verdict in the Castleton case.