Minimum Alternate Tax (MAT) Had Hurt The Market Sentiment
India’s finance minster Arun Jaitley recently said that retrospective tax is a closed issue. This is a much needed relief for FPI’s. Of late Indian markets have corrected on news of Minimum Alternate Tax (MAT) demand by tax officials arising from gains made by foreign investors in stock markets. Some foreign portfolio investors (FPI) have taken legal remedy. This Government versus FPI tussle on MAT might take long to resolve and can be a major overhang for Indian markets.
What is the issue all about?
It all started with the income-tax department sending tax notices amounting to Rs 602 crore to 68 FPI’s seeking MAT on gains made in stocks. Media estimated MAT demand by tax officials from FPI’s ranging between Rs 7,000 crore to Rs 40,000 crore. While Government thought the tax demand was legitimate, FPI’s have contested that they are not required to pay MAT.
But, what is MAT?
A company can lower its tax liability using various exemptions. Besides exemptions, there are several deductions permitted. Companies in the past used to show profits, pay dividends to investors, but due to tax planning paid little or no tax to the government. This was hurting government’s revenue. MAT is a way of making companies pay a minimum amount of tax.
How is it calculated?
In order to make companies pay taxes, MAT was introduced from assessment year 1997-98. If company’s tax liability after tax planning is less than the threshold 18.5% then the company needs to pay a MAT at the rate of 20%. MAT is applicable on the profits as shown in the financial statements. Payers of MAT are eligible for tax credit, which can be carried forward for 10 years and set off against tax payable under normal provisions.
So, what is the confusion?
It was thought that MAT was applicable to only Indian companies and not foreign companies. However, a ruling in 2012 by a tax body held that MAT provisions will be applicable to foreign companies also. Based on this ruling the tax authorities send notices to FPIs demanding MAT.
What are FPI saying?
Foreign investors are of the view that MAT is applicable only to Indian companies and not on foreign companies or investors. FIIs operate in the form of a trust and partnership and MAT provisions may not apply to them. Other key argument is that MAT can be levied only on book profits as maintained in books of accounts. But, for FPI’s there is no such requirement to maintain books of accounts. FII income is considered capital gains and subject to capital gains tax.
What is the IT department saying?
Apart from relying on the above mentioned ruling in 2012, IT department contests that many FPIs are structured in India as companies. So FPIs having business presence in India are required to pay MAT. However, FPIs based out countries like Mauritius and Singapore, with whom India has double taxation treaties, are completely excluded from this scrutiny.
Why are FPI’s spooked?
Union Budget FY16 has stated that FPIs will not be liable to pay MAT on capital gains arising on or after April 1, 2015. However, the current IT notices pertain to previous years.
What has the government conveyed?
Government has communicated that MAT will not be applicable to FPIs based out of tax haven like Singapore and Mauritius. More than 30 per cent of investments by foreign institutional investors come from such treaty countries. Further, MAT will not be applicable prospectively from 2015 onwards as per the Union Budget. But, the finance minister has gone on record that the ministry would not intervene in cases before 2015 and FPIs are free to contest the dispute the appropriate courts. On May 8, Government forwarded the MAT dispute with FPIs to a committee headed by Law Commission chairman A.P. Shah and sought an early recommendation.
Why the controversy is bad for the markets?