India to rule on MAT claims for tax treaty investors within a month

By Himank Sharma

MUMBAI (Reuters) - The tax department will rule within a month on alternative tax claims made against foreign investment funds that are covered by tax treaties, the finance ministry said, as the government moves to defuse its latest tax row with investors.

Foreign investors in India previously paid 15 percent on short-term listed equity gains, 5 percent on gains from bonds, and nothing on long-term gains. However, from late 2014 many firms received notices demanding payment of a so-called minimum alternative tax (MAT) on past income.

The uncertainty around the tax has built in recent weeks and unsettled investors, sending India's stock market lower and forcing senior finance ministry officials to this week reassure investors of the government's investor-friendly credentials.

They said claims against funds based in countries that have tax treaties with India, such as Mauritius or Singapore, would not be subject to MAT, although many had received notices.

A circular signed by India's deputy income tax commissioner and published on Friday directed tax officials to rule "expeditiously" on whether an investor can qualify for the tax treaty benefit, and hence will be exempt from MAT claims.

Analysts estimate that about half of the foreign flows in India come from investors who can claim tax treaty exemptions.

"This is a welcome step, which will clear the uncertainty for some categories of foreign portfolio investors," said Sunil Shah, Partner at Deloitte Haskins & Sells, of Friday's circular promising swift action.

"For those who do not have treaty protection, the controversy would continue till it is settled, either by the government or by the courts."

Junior finance minister Jayant Sinha added to efforts to ease concern, telling parliament on Friday that notices had been issued in 68 cases, with a total tax demand of just 6.02 billion rupees ($95 million). Finance Minister Arun Jaitley last week estimated claims at as much as 400 billion rupees.

Foreign investors have poured more than $50 billion in new investments into India since the election of Prime Minister Narendra Modi last May, pushing stocks to record highs and strengthening the rupee.

($1 = 63.5300 rupees)

(Additional reporting by Manoj Kumar in New Delhi; Editing by Clara Ferreira Marques, Clarence Fernandez and Dominic Evans)