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When Benjamin Franklin, one of America’s founding fathers, said "In this world nothing can be said to be certain, except death and taxes", he probably had Indian income tax officials in mind.
Unperturbed by the disrepute that the country has received on account of retrospective tax issues, income-tax officials continue to be trigger-happy. They have now bettered their own record by imposing the largest ever tax demand to nearly 100 foreign funds by demanding their share of ‘untaxed gains’, which would net them nearly $5 billion-$6 billion. These taxes are on account of profits made by them by investing in Indian markets.
Foreign institutional investors (FIIs) are again being made to run from pillar to post to resolve their grievances. Reports say FIIs have begun lobbying intensely with policymakers and regulators, stating that the move goes against the government's stated position of providing a 'non-adversarial and stable tax regime'. They have already raised the with Finance Minister Arun Jaitley, Minister of State for Finance Jayant Sinha, capital markets regulator Sebi, the Central Board of Direct Taxes and top Finance Ministry officials, and are now planning to approach the Prime Minister.
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.
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.
And what will likely cause them more disappointment is that Jaitley has come out very strongly in support of the I-T department. Speaking in Delhi at a CII event, Jaitley said, “We are not a tax haven and we don’t expect to be one. India is not so vulnerable that every legitimate demand can be termed tax terrorism”. He added, referring to minimum alternate tax (MAT) on FIIs, that taxes would need to be paid where the demand was right, while wrongful demand would go into litigation.
Tax experts argue that FIIs or FPIs (Foreign Portfolio Investment) cannot be subjected to MAT since their earnings are in the form of capital gains. Many of these investors do not even have an office in India; thus, their income cannot be classified as business income under the I-T Act.
MAT is applicable to domestic and foreign companies having a 'place of business in India' that are required to draw up a balance sheet and a profit and loss account for their business income.
FIIs investment of late have slowed, resulting in a flat performance of Indian markets compared to others in the developing world. Many international bodies have raised a red flag over the latest move by the tax department saying "this may act as strong deterrent for foreign investment in India". These organisations include European Fund and Asset Management Association (EFAMA), Asia Securities Industry and Financial Markets Association (ASIFMA) and ICI Global, while many foreign funds have also individually raised the issue.
Income tax officials (Read here) have been quoted as saying that the Authority for Advance Rulings had ruled in tax department's favor, which allows it to levy MAT on capital gains. But the government has proposed to amend the law after FIIs raised concerns. Offshore funds, however, said these "amendments will take effect from April, 1, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years".
Officials defended the notices saying that they have been issued under the current legal regime. "Every action against foreign players should not be blown out of proportion especially when the government is trying to address concerns. It should be seen in the context of its legal validity. Other countries have similar laws, India alone doesn't have such laws," a senior officer has been quoted in this report in the Times of India newspaper.
Tax expert Gautam Nayak has explained the issue of MAT in this interview to Deccan Chronicle where he says that Schedule 6 (115 J (b)B) of the Income-Tax Act in a reference to MAT was amended a few years ago to bring under its purview, even those entities who were not preparing their accounts under the Schedule. This was intended to bring in entities like the banks and electricity companies. “This was understood to be meant for domestic companies. But they (IT officials) are now extending it to FIIs because of the ambiguity involved.” He said “The aggressiveness of the tax authorities in interpreting the law is a worrying factor. It is an extreme interpretation of the way the tax law has been interpreted.”
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 USD 226 billion (over Rs 11 lakh crore), but till date only 10 per cent of them have received such notices.
Speaking to the Times of India, Rajesh H Gandhi, Partner at Deloitte Haskins & Sells, said uncertainty over MAT could hurt the investor sentiment. "So far, only FIIs have received MAT demand but there are also concerns that it would be extended to foreign companies as well.... Now only about 10 per cent of FIIs have received such notices and numbers could increase in due course."
FIIs are now asking the PM in his style ‘Hum par tax lagna chahiye ki nahin lagna chahiye?’ It is for the PM to decide, as his cabinet colleagues are not willing to take a call.
