Ending the debate on whether foreign companies will be subject to minimum alternate tax (MAT) provisions, the government on Thursday clarified that the tax regime would not apply to overseas firms not having a permanent establishment in India.

An official statement from the Ministry of Finance said that two categories of companies — foreign companies with no permanent establishment in India but based in countries with which India has a Double Taxation Avoidance Agreement, and those with no place of business here — will not be covered under MAT.

This move follows the recent decision of the government to exempt foreign financial institutions/foreign portfolio investors from MAT.

“After due consideration of the various aspects of the matter, the government has decided that with effect from April 1, 2001, the provisions of Section 115JB shall not be applicable to a foreign company — if the foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under Section 592 of the Companies Act 1956 or Section 380 of the Companies Act 2013,” the statement said.

Amendment soon

An appropriate amendment to the Income-tax Act in this regard will be carried out, it added.

This decision could have a bearing on the case involving Mauritius-based Castleton Investment. Since the amendment will be made retrospectively, Castleton can expect relief in the case, in which it challenged the Authority for Advance Rulings’ (AAR) decision to levy MAT on it for capital gains on share transfers. The next date of hearing in the Supreme Court is on September 29.

“The proposal to amend the Income-Tax Act on non-applicability of MAT to all foreign companies not having a place of business in India is a very welcome step as it will remove ambiguity and encourage foreign investments into the country,” said Girish Vanvari, National Head of Tax, KPMG.

The AP Shah Panel, which was mandated to look into the applicability of MAT on FIIs/FPIs, had also said that the AAR’s ruling in the Castleton issue was “completely wrong”.

Contentious issue

Confusion had arisen on the applicability of MAT on foreign companies after the Finance Ministry provided MAT exemption to FIIs/FPIs earlier this month but did not clarify on foreign companies.

The issue of applicability of MAT on non-FII/FPI foreign companies is under litigation in the Supreme Court as part of the ongoing Castleton case.

Sameer Gupta, Leader for tax financial services, EY India, said that with this announcement, the government has addressed a complete set of investors — for instance, for investments under the FDI route, FVCI route etc.

“What now is to be seen is if these amendments are taken up and pushed through the Winter Session of Parliament, as possibly indicated by the government earlier in the month,” he added.

Since 2012, the tax department has been raising MAT demands on foreign companies based on the AAR’s ruling in the Castleton case.

The ruling was a departure from its decisions in the Timken Co as well as Praxair Pacific Ltd cases in 2010, where it contended that MAT is not applicable on companies without a permanent establishment or place of business in India.  

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