In a breather to foreign portfolio investors (FPIs) who have been dogged by retrospective demands on the minimum alternate tax (MAT) from 2008, the Bombay High Court today stayed tax notice issued to Scottish portfolio investor Aberdeen.
The interim stay comes a day ahead of the High Court taking up the writ petition filed by five FPIs last week against MAT notices issued by tax authorities.
The Income Iax department has sent tax notices demanding MAT on the profit they earned from trading in stocks and bonds to 68 FPIs, seeking a cumulative Rs 603 crore in dues beginning from assessment year 2008.
A division bench, headed by Chief Justice Mohit Shah, was hearing a petition filed by Scotland-based Aberdeen Global Emerging Markets challenging the I-T notice and assessment orders.
Similar petitions had been filed by National Westminster Bank Plc, First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund, First State Global Emerging Market Sustainability and BNP Paribas L1. They will come up for hearing tomorrow.
The counsel, appearing for Aberdeen, today argued that there was no effective alternate remedy available to them and hence they approached the High Court for relief.
The Income Tax Department lawyers opposed this argument, submitting that the companies can file an appeal before the I-T Tribunal.
The High Court, while posting the Aberdeen petition for hearing on June 22, granted interim relief to the company by staying the I-T notice and orders.
These investors, who are not covered under the double taxation avoidance agreements (DTAAs), received notices from the I-T Department in early April asking them to pay MAT.
So far, the Department has sent demand notices to 68 non-DTAA FPIs, seeking altogether Rs 602.83 crore.
As there are close to 3,000 FPIs, most of them not covered by DTAAs, the I-T department is expecting to collect around Rs 40,000 crore.
Around 40 per cent of the FPIs in the country come through Singapore and Mauritius with which India has DTAAs.
These are, therefore, not liable to pay MAT on the capital gains but their holding in the domestic stock market is only around 30 per cent of the total Rs 22 trillion.
MAT was orginally meant to be charged only on manufacturing sector and not on companies active in financial or other services sector.
Aberdeen AMC, the world’s largest fund management firm with over 350 billion pounds in assets, on May 2 moved the HC through its fund Global Emerging Markets, as per the information available with the court’s registry. It is being represented in the HC by law firm Nishith Desai Associates.
Aberdeen joins the Luxembourg-based BNP Paribas and London-headquartered National Westminster Bank PLC, which are among five firms fighting against government’s retrospective tax demands.
Another FPI, Castleton Investments, is already fighting a retro tax case in the Supreme Court and last week both the litigant and the government agreed to expedite the hearing in the matter pending since 2013.
The Mauritius-based Castleton moved the SC against a 2012 verdict of Authority for Advance Rulings (AAR), which said it had to pay MAT on capital gains from sale of shares.
The 2015 budget has clarified that MAT would not be levied on capital gains made by FPIs but this relief is available prospectively from the current fiscal.
FPIs argue that they have no permanent place of business or establishment in the country. They also claim that they do not have to maintain books of account or liable to pay any tax on their capital gains earned from the securities markets. The MAT demand is at the rate of 20 per cent.
Under new norms, FPIs are not required to pay any tax on long-term capital gains (gains made over one year) but they are liable to pay short-term capital gains tax on profits booked under one year at an effective rate of 15 per cent.
According to market regulator SEBI, over 8,200 FPIs are registered with it and close to 70 per cent of them are from non-DTAAs territories. The remaining come through DTAA territories like Singapore and Mauritius.
FPIs collectively own more than Rs 22 trillion in domestic equities and bonds. Since last May alone, they have pumped in USD 51 billion into Indian markets.
On April 23, government had assured FPIs from the US and other non-DTAA localities that they could avail of treaty benefits to ward off tax demands on capital gains booked over the years till March 31.
Singapore and Mauritius-based FPIs can avail of full treaty benefits to ward off tax demands, while the tax treaties with Britain and the Luxembourg do not completely exempt them from capital gains.
The retro-tax issue escalated last fortnight with FPIs collectively pulling out a whopping USD 1.8 billion in the cash segment of markets since April 15. FPIs encompass all FIIs, their sub-accounts and qualified foreign investors under a new regime notified from June 1, 2014.