The latest Union Budget spelt relief for foreign portfolio investors with two unpopular tax moves being scuttled or deferred.
Finance Minister Arun Jaitley said that Minimum Alternative Tax will not apply to foreign investors. He has also said that General Anti Avoidance Rules (GAAR) would be deferred by two years.
The GAAR provision expanded the powers of tax authorities. The Minimum Alternative Tax was originally brought into play to bring into the tax net large domestic corporate who did not pay taxes by making use of various incentive schemes. The tax authorities had recently sent communications under the provision to foreign portfolio investors, asking them to explain why the provision should not apply to them.Read our full coverage on Union Budget
The MAT provision would have raised their long term capital gains tax from zero under the current regime to around 20 per cent. The net impact of would have run into tax liabilities for thousands of foreign investors.
“No MAT for FIIs is a very welcome step and relaxes the uncertainty created recently by the tax notices. Also welcome clarification that there will be no PE on presence of fund managers,” said Rajesh H. Gandhi, Partner – Tax at Deloitte Haskins & Sells.
PE or Permanent Establishment refers to the presence of an entity in the country which makes it liable to taxation. This would not apply to asset managers whose fund managers are located in the country, said the Finance Minister.
Foreign investors currently hold over 40 per cent of India’s free float in equity markets. Free float refers to shares available for public shareholding.