All you need to know about MAT that has spooked FIIs and markets

Arun Jaitley says government can garner Rs 40,000 cr through this tax. Now all eyes are on the Supreme Court where an appeal is pending on the issue.

1) What is the 'MAT' issue?

Minimum Alternate Tax is a tax that foreign institutional investors would have to pay on capital gains arising out of book profits. The tax authorities are reopening cases for previous years. Currently 90 foreign portfolio investors have been sent notices by tax authorities. The effective rate of tax for FIIs is 20% currently. MAT origins can be traced back to late 1980s 

Finance Minister Arun Jaitley announced in the Budget that FIIs will not be required to pay MAT from April 2015. But the tax department and the government seem to believe that this tax can be levied for previous years. The FM last week has reportedly said that the government can garner Rs 40,000 crore through this tax. Foreign investors are of the opinion that the new tax claims have the blessings of the government.

 

2) Why are FIIs against it?

Foreign investors argue that they are foreign entities and they are not liable to prepare their accounts in India and, therefore, not liable to pay MAT. 

3) What is the genesis behind MAT?

In 2010, the Authority for Advanced Rulings (AAR) ruled in a case that MAT did not apply to foreign companies that didn't have a place of business in India.

But in August 2012, AAR ruled that MAT should be levied on FIIs. The present government is largely going by the precedent set in case of Castleton Investments, where the Authority for Advance Ruling (AAR) gave a verdict, that Castleton is liable to pay MAT when it transferred shares from a Mauritius entity to a Singapore entity. Castleton Investments is owned by the Wellcome Limited of UK that held shares of Glaxo India which it transferred to its Singapore entity as part of the post-merger restructuring of Glaxo and Burroughs Wellcome. 

From a policy point of view, there was a grey area on whether FIIs are liable to pay MAT. Thus, AAR levied it and the government of the day did not clarify. The matter is pending in the Supreme Court now. 

4) Do all FIIs have to pay this tax?

The tax authorities have currently sent notices to 90 foreign portfolio investors registered as 'companies' in India. FPIs registered as trusts or partnerships will not come under the ambit of MAT for now.

5) Which FIIs will be exempt from MAT?

Currently, FIIs  which have come to India through Singpore, Mauritius and Netherlands are exempt under the DTAA (double tax avoidance agreements). However, FIIs and their legal advisors are not sure how long these FIIs will be exempt.

6) So, what next?

An appeal against the applicability of MAT on FIIs is pending in the Supreme Court, but the timeline of the case coming up for hearing and final settlement is not clear. Meanwhile, the government is caught between a rock and a hard place. Minister of State for finance Jayant Sinha is currently meeting FIIs, explaining the government's committment to a non-adversarial tax regime in India. Speaking to reporters today, Sinha clarified that while they have already set laws in place that will not allow the application of MAT on FIIs in future, the cases arising out of retrospective application of laws will have to be settled by the Supreme Court.