In a major relief to foreign portfolio investors, Finance Minister Arun Jaitley on Tuesday said the government has decided not to levy Minimum Alternate Tax (MAT) on capital gains made by FIIs retrospectively.
Jaitley, who has in his budget for 2015-16 exempted FIIs from payment of MAT with effect from April 1, 2015, said the government has accepted the recommendations of the Justice A P Shah panel that there was no basis for levy of such tax for the prior period as well.
The government, he said, has decided to amend the Income Tax Act to clarify the issue with regard to levy of MAT on FIIs and in the meantime CBDT field officers will be asked not to pursue cases against FIIs.
The announcement comes at a time when the capital markets are witnessing excessive volatility following the global financial turmoil that has led to FIIs pulling out funds from the emerging markets.
Jaitley said legal recourse taken by certain FIIs on being slapped with tax notice would have been time consuming and so the government decided to pursue alternative course for resolving the issue.
"We are of the considered opinion that the alternative course suggested by the Justice Shah panel, that a necessary amendment in the Income Tax Act would be required...(would be pursued). And we would be bringing out that amendment in the statute.
"Meanwhile, pending such amendment, all the field formations will be conveyed by way of circular that this is the decision of the government so they will have to hold their hands and not make or pass any orders in these matters till such time. Hopefully in the winter session of Parliament or whenever there is next session of Parliament, we will be able to bring out such an amendment expeditiously", he said.
The controversy arose after the tax department, following an order by the Authority of Advance Ruling, sent notices to 68 FIIs demanding Rs 602.83 crore as MAT dues.
When asked what happens to the notices sent to FIIs, Jaitley said the income tax law will take its own course and circular would be issued to field officers by tomorrow.
The Minister said ambiguity over MAT applicability on FIIs needed to be resolved and investor confidence could get a boost as a consequence of this.
"Confidence among investors could be a consequence of this. But having certainty and clarity in tax law, this is one of the essential function of the government. And since an ambiguity had arisen on account of conflicting opinions, that ambiguity required to be resolved," Jaitley said.
The decision to amend the Income Tax Act follows the modified recommendations of the Shah panel which were submitted to the Ministry on August 25, Jaitley said.
Through the amendment the Government will clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to April 1, 2015.
The A P Shah panel in its report has summarised that "tax "certainty should be a "desirable goal".
"FIIs are mostly open-ended investment funds, which permit their investors to enter and exit daily, based on the NAV of the fund, unanticipated tax liability (or the fear thereof) relating to previous years, which would have to be borne by the current investors, may be a sufficient trigger for the investors to exit," it said.
The sudden change in the interpretation of the applicability of Section 115JB to FIIs/FPIs thus contextualises the need for tax certainty.
In the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD.
The Shah Committee has come to the finding based upon precedent that having an 'established place of business' is different from merely carrying on a business in India.