Are foreign investors really liable to pay MAT?

It was clearly the Income Tax Department’s demands for minimum alternate tax (MAT) on foreign portfolio investors (FPI) that derailed the market since the middle of April making these investors net sellers. The Finance Minister has now backtracked by announcing that a committee will be set up to examine whether FPIs are liable to pay MAT. The I-T Department has also announced that new notices will not be issued and no further action will be taken on already issued notices, till the committee gives its recommendations.

But are FPIs liable to pay MAT under income tax rules? Two tax experts, Rajesh H Gandhi, Partner, Deloitte Haskins & Sells LLP and Shefali Garodia, Partner, BMR & Associates LLP answer some questions on this.

Is it right to charge MAT on FPIs? Isn’t MAT calculated by adding back certain deductions claimed to book profits?

Rajesh Gandhi: Technically, MAT applies to every company and MAT provisions do not specify that MAT applies only to Indian companies — that’s where the controversy lies. However, when MAT was introduced, the intention of the government was clear and they wanted to tax the so-called zero-tax companies, which had significant book profits but paid little or no tax because of various tax holidays and deductions.

The intention was not to levy MAT on FPIs as they do not get any tax holidays or special deductions.

Even Courts have held in the past (two advance rulings and one recent Delhi Tribunal ruling) that foreign companies which do not have a permanent establishment in India are not liable to pay MAT. The only support on which the government has been relying is the 2012 advance ruling in the case of Castleton Investments which said that foreign companies are also liable to MAT.

While MAT is payable on book profits, tax officers have sought to levy MAT on the net capital gains determined by FPIs under the normal tax provisions.

Since most of the FPIs have global operations and investments it is difficult to determine the expenses and consequently the net book profits applicable to the Indian operations.

The FPIs do not maintain books of accounts according to the Companies Act. Is that another reason why they cannot be charged MAT?

Rajesh Gandhi: That is one of the reasons why MAT cannot be levied on FPIs. According to MAT provisions (Section 115JB(2)), every company is required to prepare its profit and loss account according to the Companies Act and prepare accounts using the same accounting policies and standards which have been adopted for preparing the profit and loss account and laid in its AGM. FPIs are obviously not required to comply with these provisions and, therefore, should not be liable to MAT.

Does capital gains tax fall under the purview of MAT?

Shefali Garodia: For those foreign companies that maintain books of accounts in India, all of their income becomes a part of book profit.

Therefore, capital gains also get included for calculating book profit for MAT purposes. Ideally, where concessional rate of tax is offered for special categories of income or special categories of persons, there should be an exemption from MAT. This has now been announced in the amended Finance Bill for certain types of incomes.

What were the other reasons due to which FPIs were not paying taxes?

Rajesh Gandhi: FIIs are taxed under a special provision, i.e., Section 115AD of the Income Tax Act, which provides for special rates of taxes applicable to income earned by them.

What changes did the Castleton ruling bring?

Shefali Garodia: In the Castleton case, an advance ruling was sought on whether or not a Mauritius resident investor is liable to MAT. Unfortunately, the answer there was against Castleton. An appeal against this ruling is pending before the court. Relying on this ruling, the IT department has made out a case for MAT against FPIs. However, the department has not followed this ruling entirely. It has already been announced that FPIs based in treaty countries, such as Mauritius and Singapore, will be exempt from MAT.