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FIIs will be liable to pay MAT; if budget stays mum on the issue

Tax officials say that they already have responses from FPIs on the show cause notices and are examining them for a final demand of tax

Sachin P Mampatta & Jayshree P Upadhyay  |  Mumbai/New Delhi 

Another case of tax uncertainty is poised to hit India if the fails to provide clarity. The issue at hand is the demand of Minimum alternate tax (MAT) to close to 300 Foreign Institutional Investors (FIIs) that do business in India.

As per sources the income tax department would pass orders during March end if the finance ministry or doesn't specifically clarify whether MAT is applicable on Foreign Portfolio Investors (FPIs) or not.

Tax officials say that they already have responses from FPIs on the show cause notices and are examining them for a final demand of tax.

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“There is no explicit provision in the IT act which exempts FIIs from MAT. Our assessment while passing orders would depend on case to case basis until and unless the ministry intervenes,” said a tax official on condition of anonymity.

As per sources the FIIs that have received notices from the tax department includes top foreign investment banks that are advising foreign investors on investing in India.

Markets players said if the clarity is not provided for in the then the country is heading towards huge litigation.

“This could lead to potential loss of reliance on India as an investment destination. Express clarification is needed from the ministry to nip this issue in the bud. Last year budget had clarified that MAT can be levied only on book profits and as a norm FIIs are not required to report profit and loss account,” said Vikas Vasal, Director, KPMG.

The tax department has asked a number of FPIs to make available their P&L statements and balance sheets, though they are not required to do so in the normal course of filing returns.

Typically, such statements are filed by companies. The department's move is being seen by tax consultants as part of a larger push to levy Minimum Alternative Tax (MAT) on FPIs.

Suresh Swamy, partner (financial services), PwC Tax and Regulatory Service suggested that MAT proceedings could also have an impact on foreign investors coming from treaty jurisdictions. Such investors typically enjoy tax benefits which make the net levy zero, for instance from places like Mauritius.

"It is also not clear if exemptions for entities based out of treaty jurisdictions would be valid in such a situation. That remains a grey area," he said.

A CBDT spokesperson declined to comment on the issue.

These strategic investors have raised their concerns with the prime minister and finance minister and are hopeful that a clarity on the issue would be a part of the budget.

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First Published: Tue, February 10 2015. 10:59 IST