MAT clarity in Finance Bill

The government is likely to clarify at the time of the passage of the Finance Bill in Parliament that MAT will not be applicable on foreign portfolio investors belonging to nations with whom India has double tax avoidance pacts.

The budget session of the Lok Sabha ends on May 8, while the Rajya Sabha will continue till May 13. The Finance Bill is likely to be taken up for discussion in Parliament next week.

The double taxation avoidance agreements (DTAA) with various countries will be studied separately while exempting the FIIs from paying MAT, finance ministry sources said.

arlier in the day, minister of state for finance Jayant Sinha said the government was considering clarificatory amendments to minimum alternate tax (MAT) rules.

According to sources, while foreign investors paying capital gains tax in their home nations will not be subject to 20 per cent MAT, investors coming from DTAA nations such as Mauritius and Singapore may be exempt as there is no tax on capital gains there.

Sinha, along with other top government officials, met foreign institutional investors (FIIs) yesterday, and said they should approach the courts to get relief on these matters.

Tax notices given till date have been to companies which have offices in India but whose parents are located in countries not covered by tax treaties.

However, companies which do not have offices or any physical presence here, even if they operate from countries not covered under a tax treaty, have not received such tax demands. These include pension and children’s funds that directly invest in Indian markets through offshore banks.

India has DTAAs with 88 nations, of which 85 are in force. DTAAs with Mauritius, Singapore, Cyprus, France and the Netherlands exempt funds from capital gains tax in India, while those with the US, the UK and Luxembourg allow India to impose capital gains tax the way it wants to.

The top four nations investing in India through the FII route – the US, Singapore, Mauritius and Luxembourg – have DTAAs with India. Till May 2014, of the total FII flow of about Rs 17 lakh crore, inflows from the US stood at Rs 5.29 lakh crore, Mauritius Rs 3.98 lakh crore and Singapore Rs 2.02 lakh crore.

Foreign investors in India have previously paid 15 per cent on short-term listed equity gains, 5 per cent on gains from bonds, and nothing on long-term gains, but from late last year many firms received notices requiring them to pay MAT on past income. This could bring overall tax on gains to as much as 20 per cent, alarming many investors.

In February, finance minister Arun Jaitley moved to exempt from MAT capital gains made by foreign investors as of April, but left the field open for more than $6 billion in tax demands on past gains – triggering further uncertainty that has dragged the rupee and equity markets lower.

The revenue department has already sent notices to FIIs, demanding 20 per cent MAT on capital gains made by them till March 31, 2015.

For all other foreign investors except those falling under DTAA, the only remedy left is to challenge the levy on capital gains they made in the past three years.

Meanwhile, Moody’s vice-president Atsi Seth today stressed the need to resolve tax issues saying “uncertainty on tax issues is a deterrent to investment climate. Clarity on tax issue is important”.