The applicability of Minimum Alternate Tax (MAT) to foreign
companies in India has historically been a complex issue.
Essentially, MAT is taxation on the 'book profits' of a
company although under the Income Tax Act, 1961 (ITA), no tax would
be payable because of tax holidays, exemptions, etc.
Earlier this year, the Indian tax authorities, taking a cue from an advance ruling in case of Castleton Investment Limited1, took a stance that even foreign institutional and portfolio investors (FIIs/FPIs) are liable to MAT. The Indian tax authorities sent notices to various FPIs/FIIs and raised tax demands as well. It is understood that notices were issued to 66 FIIs/FPIs and the tax demand raised amounted to approximately INR 6 billion.
This became a major issue with FIIs/FPIs and they reacted by raising their concerns to the government. The government in its budget for 2015-16 provided relief and specified that from 1 April 2015, MAT would not be applicable to foreign companies earning capital gains from India. However, confusion with respect to the preceding years remained and FIIs/FPIs who had received tax demand orders faced litigation. Meanwhile, concerns were raised with the government, and the repercussions were visible on the Indian stock exchanges.
In order to resolve this escalating issue, the government, on 20 May 2015, constituted a three-member committee (the A P Shah Committee) comprising of retired Justice A P Shah, Dr Girish Ahuja and Dr Ashok Lahiri to examine the applicability of MAT to FIIs/FPIs prior to 1 April 2015.
The Committee's findings
After receiving representations from various stakeholders and
having discussions with them, the Committee submitted its report to
the government on 24 August 2015. The report was made available to
the public on 1 September 2015, and can be accessed here.
The key observations/findings of the Committee are:
- The legislative history of MAT provisions suggests that they only apply to companies required to comply with the Indian Companies Act - FIIs/FPIs are not required to comply with the Companies Act.
- The term 'company' for MAT purposes has to be given a contextual and not literal interpretation - it has a narrower scope here and does not include FIIs/FPIs.
- FIIs/FPIs ordinarily do not 'establish a place of business' in India under the Companies Act but only 'carry on a business in India'.
- MAT can be levied on 'book profits' computed as per accounts maintained under the Companies Act - a condition which does not apply to FIIs/FPIs. Where it is impossible to compute the tax, the levy of tax must also fail.
- FIIs/FPIs have their own self-contained code for concessional taxation under the ITA2 and applying MAT provisions would render this separate code redundant, which does not appear to be the ITA's intention.
- The prospective amendment made by the Finance Act, 2015 was only clarificatory in nature, and the tax authorities' interpretation of this amendment to mean that MAT applied to FIIs/FPIs prior to 1 April 2015, was incorrect.
- Regardless of the interpretation of the applicability of MAT provisions to FIIs/FPIs, MAT will not apply where a beneficial tax treaty is available to such FIIs/FPIs. The interpretation of the Authority for Advance Rulings (AAR) to the contrary in case of Castleton was incorrect.
- None of the BRICS countries (other than India) levy MAT. Furthermore, other countries that do levy MAT, levy the same on foreign companies/persons only if they have a presence in those countries.
The Committee's recommendations
The Committee recommended the government to:
- Amend the ITA to clarify the 'complete inapplicability' of MAT provisions to FIIs/FPIs; or
- Issue a circular clarifying the 'complete inapplicability' of MAT provisions to FIIs/FPIs.
Government's comments on the Committee report
The Finance Minister, Arun Jaitley, in a press conference on 1 September 2015, stated that the government has accepted the recommendations of the Committee and suitable clarifications will be issued soon through a Circular and amendment to the ITA.
- The Committee's recommendations are commendable. The manner in which the Committee has gone into the legislative history and judicial precedents as well as allied laws in itself builds a case for the non-applicability of MAT to FIIs/FPIs.
- The government's decision is a prudent one as the stance of the tax authorities would not have stood the test of legal scrutiny. Accordingly, this decision signals the government's intent to avoid litigation.
- The government should now move quickly and amend the law and also provide interim relief through a Circular.
- However, it would have been better if the terms of reference of the Committee were extended to include foreign companies also (other than FIIs/FPIs). As of now there is no relief for such foreign companies for applicability of MAT before 1 April 2015 and they would have to contest this in court. The focus is now on the Supreme Court proceedings in case of Castleton and the government's approach towards the same, especially since the Committee has specifically observed that it does not agree with the AAR's ruling in case of Castleton.
1 AAR No. 999 of 2010
2 Section 115AD
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