100 foreign funds get tax demands, total bill may hit $10-bn

Till March 31, close to 100 FIIs got notices from Tax Department for a controversial Minimum Alternate Tax of 20%

In the biggest-ever tax demand slapped on them, nearly 100 foreign funds have been asked to cough up an estimated $5-6 billion for “untaxed gains” made by them in the Indian markets over the past years.

The number of affected investors can rise substantially as assessments are still in progress and notices could be served in many more cases, taking the overall tax demand from them to well over $10 billion, sources said.

Spooked by these “retrospective” notices and assessment orders, the foreign investors have begun lobbying intensely with the policy makers and regulators, while stating that the move goes against the government’s stated position of providing a “non-adversarial and stable tax regime”.

Till March 31, close to 100 foreign institutional investors (FIIs) got notices from the tax department for a controversial minimum alternate tax (MAT) of 20 per cent, while they are now being followed up with assessment orders.

The FIIs have, however, decided to challenge the tax demands, stating that MAT cannot be levied on FIIs or foreign portfolio investors (FPIs) as they do not earn any 'business income' in India and their income is defined as ‘capital gains’ under the I-T Act.

These FIIs, many of whom have now converted themselves into FPIs include entities from the US and Europe as also those operating through Singapore, Hong Kong and Mauritius.

Among others, the issue has been raised by FIIs with Finance Minister Arun Jaitley, Minister of State for Finance Jayant Sinha, capital markets regulator Securities and Exchange Board of India, the Central Board of Direct Taxes and the top finance ministry officials, while they are now planning to approach Prime Minister Narendra Modi to intervene in the matter.

When contacted, a top official said the government was looking into the matter to allay any genuine concern such investors might have, but added that no assurance could be given as of now to nullify the notices. There are an estimated 8,000 FPIs registered in the country and they have emerged as a mainstay of the Indian markets over the years with an overall outstanding net investment of $226 billion (nearly Rs 11 lakh crore).

This includes over Rs 8 lakh crore in stocks and Rs 3 lakh crore in debt markets. In the 2014-15 financial year itself, FPIs made a net investment of Rs 2.7 lakh crore into the Indian markets.

Interestingly, this is the first time since 1993, when FIIs were allowed to invest in the Indian markets, that such investors have been asked to pay MAT.