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Working on FPI worries, says govt

Government working on resolving the issue for foreign portfolio investors debt investments; suggests they join pending case in SC and seek early hearing

Dev Chatterjee & Sachin P Mampatta  |  Mumbai 

Arun Jaitley, Jayant Sinha
Union Finance Minister Arun Jaitley and MoS Finance Jayant Sinha interacts with state finance ministers during a meeting of Union Finance Minister with the empowered committee of state finance ministers in New Delhi.

The central government is working on addressing issues related to the application of Minimum Alternate Tax (MAT) to debt instruments. The issue might be dealt with in the Finance Bill, incorporating the Budget proposals and awaiting Parliament passage.

Meanwhile, foreign investors have also been asked to join the pending case in the Supreme Court on a petition against application of MAT. And, seek an early hearing.

These issues were discussed in a conference call with foreign investors, organised by a foreign financial services firm. From the government were minister of state for finance Jayant Sinha, Revenue Secretary Shaktikanta Das and Anita Kapur, head of the Central Board of Direct Taxes.

“The Finance Bill will be passed in Parliament, which is when this prospective action on MAT will become law…This matter you brought up is under consideration right now but will be resolved before it is passed… If we have a decision on that sooner, we will announce it,” said Sinha.

Some foreign investors in the call expressed surprise at the sudden imposition of MAT, which raises the tax liability for many of them from zero to 20 per cent. It was originally meant to address domestic companies which make large profits but do not pay taxes because of legal exemptions. The tax department imposed this on foreign corporate investors after a ruling that it would apply to them. An appeal against this is still pending in the Supreme Court.

This is the first time that foreign portfolio investors (FPIs) have been asked to pay MAT on their investments in equity and debt. “This is another bolt from the blue for us. The withholding tax reduction from 20 per cent to five per cent in May 2013 was meant to encourage investment in government securities at that time and that was why many of us came in. It looks like that five per cent might not apply and MAT might,” said one foreign investor.

“Even if somebody wants to add some money, overseas money in such funds, they will not until they have more clarity,” said another.

A Budget clarification exempted equity capital gains from MAT. A view was taken that this would be prospective and tax on previous years still requires to be paid. Debt was not mentioned, which raised the question as to whether MAT was to apply both prospectively and retrospectively to all FPI debt investments. Foreign investors hold Rs 3.34 lakh crore in debt assets, showed depository data as of last month, though there is no information on how much of this is held by FPIs structured as corporate entities.

“If the debt issue is addressed, it would definitely be a big relief. They have to pay five per cent now versus 20 per cent if MAT is to apply, which has a big impact because they work on thin margins,” said Rajesh H. Gandhi, partner–tax, Deloitte Haskins & Sells.

Other foreign investors asked how debt and other income would be addressed under MAT. “Interest income and other incomes together…That is also under examination and we will be clarifying that shortly,” said Shaktikanta Das.

Adding: “In fact, I would suggest that whoever has gone to the Supreme Court can file a petition to get that matter expediated. We would also be very keen that the SC takes up this matter…as early as possible and gives its final judgement. Even others can…you have the option of examining the whole issue and if you wish, it's up to you, I mean I’m not asking you to do so because I cannot and it has to be entirely your decision, it's up to you if you want to get impleaded in that case and make a petition before the SC, apex court of the country, for taking up that case for early hearing so that there is judicial settlement of this issue.”

It was also clarified in the call that MAT would not apply to FPIs coming from treaty jurisdictions. “…This is indeed a positive announcement. …While re-assessment proceedings have been initiated, it would mean that if these announcements are given effect to, MAT should not apply to treaty-protected cases,” said Sameer Gupta, tax leader for financial services, EY.

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First Published: Thu, April 23 2015. 00:39 IST