Minimum alternate tax (MAT) provisions were introduced to tax companies that declared a book profit, but did not pay corporate taxes, mainly on account of incentives from the Government.
Over the years it was believed that MAT should be levied only on companies operating in India, as certain benefits or concessions were given under the Income Tax Act to domestic companies. This intention stems from the Memorandum to the Finance bill of 1987, which clarified that ‘domestically widely held’ companies would pay tax on their book profits.
However, recently, the Authority for Advance Ruling, in the matter of Castleton Investment, ruled that MAT provisions do not distinguish between domestic and foreign companies — therefore, foreign companies are liable to pay MAT. The Ruling was contrary to its own view in an earlier ruling of Timken France. Then, the AAR had ruled that in case foreign companies do not have a permanent establishment in India, MAT should not be payable.
Interestingly, in the Castleton ruling, it was also held that a foreign company is entitled to the India–Mauritius tax treaty. Therefore, one may wonder that if a treaty can be applied, whether it should be governed by the domestic law as well.
One should take note of Section 90(2) of the Income Tax Act, which provides that provisions of the Act will be applied only if they are more beneficial than a tax treaty to a non-resident assessee. Therefore, unless provisions of the Income Tax Act are beneficial to an assessee, one should continue to be governed by the treaty between two countries. Once a non-resident is outside the purview of applicability of domestic tax law, MAT provisions should not be applied.
Furthermore, MAT provisions mandate that every company should prepare its accounts as per Schedule VI of the Companies Act, and the accounts presented at the annual general meeting of the company. However, the AAR countered this requirement by suggesting that difficulty in preparing, or legally not being required to prepare accounts under the Companies Act by foreign companies cannot be a reason to truncate the scope of MAT provisions.
It went on to add that it is for the legislature to determine the scope of MAT. However, one needs to recognise that the language of the MAT provisions, and the backdrop in which they were introduced, suggest that MAT should apply only to domestic companies. This point, however, was not considered by the AAR.
Nonetheless, due to conflicting views on the subject, litigations in many situations could arise, unless the legal provisions are interpreted by a higher judiciary.
For example, in the case of foreign companies receiving technical fees, or royalty income, where normally tax is withheld at 10 per cent; foreign companies with income only on account of sale of shares and which are not liable to pay capital gains tax in India on account of a favourable treaty. This could lead to anomalies on how to calculate book profit, especially for foreign companies that have global income and expenses.
Therefore, in the given situation, taxpayers should either wait for a ruling from the higher judiciary, or the Government should take suo motu action and clarify legislative intention to avoid protracted litigation. The latter is especially relevant at a time when foreign investors do not have a positive perception of Indian tax regulations and their application.
Girish Vanvari is Partner, KPMG