Minimum Alternate Tax on foreign investors: A MATerial impact

14 May, 2015

The recent turn of events around the levy of Minimum Alternate Tax (‘MAT’) on foreign investors represents a curious case. Though quite different from the much publicized Vodafone case, it has drawn parallels with the case and has raised a concernamongst the foreign investor community, especially after the new Government’s assurance of addressing, as they had termed, ‘tax terrorism’ issues. This article seeks to summarise the issue and the key takeaways from the perspective of Private Equity (‘PE’) investors, in a “FAQ” format.

Q. What is the levy of MAT all about?

MAT was introduced a couple of decades ago to levy tax on “zero tax” companies that disclosed profits in their books of accounts but reported NIL or insignificant taxable income by availing tax exemptions, deductions, incentives. Broadly, the provisions seek to tax companies at aneffective rate of 20 percent on their “book profits”, to be computed in accordance with the relevant provisions of the Companies Act, subject to certain adjustments. MAT paid (over and above regular tax payable) can be generally carried forward for set-off against normal tax liability (over and above MAT) for 10 years.

Q. Was the levy of MAT applicable to foreign investors?

Sparing readers fromthe technicalities at the outset, a distinction needs to be made between foreign investors/companies that have a presence in India (such as foreign banks that have branches in India) and foreign investors who merely hold investments in India (such as PE funds). This article discusses applicability of MAT to the latter, who are organisedas companies.

While the provisions of the income-tax law are couched widely and could be stretched to interpret that MAT applies such foreign investors, there are enough and more arguments to suggest that MAT cannot be extended to such foreign investors.

Q. What is the genesis of the recent action of the Income Tax authorities?

For almost two decades, the Income-tax authorities have generally, leaving aside stray instances, never sought imposition of MAT on foreign investors. Given the possibility of contrary views, in certain advance rulings, applicants sought views from the Authority for Advance Ruling (“AAR”) on applicability of MAT to foreign investors. Unfortunately, the AAR pronounced contrary rulings. A negative ruling in the case of Castleton Investments[1]escalatedthe matter and is now extensively relied upon by the Income-tax authorities to levy MAT.

Q. Have notices been issued to foreign PE funds for levy of MAT?

Notices for levy of MAT have been largely issued by the Income-tax authorities to FIIs that are domiciled in non-treaty jurisdictions.

Q. How would have MAT impacted PE Funds?

MAT, if applicable, could have been relevant for foreign PE Funds in the context of taxability of the gains/income earned by them in India, withholding tax at the time of exit, liability as a ‘representative assessee’, discussions on indemnities.

Q. What are changes proposed by Budget 2015 in this regard? Can MAT be levied on foreign PE funds going forward?

To ostensibly allay the apprehensions of foreign investors given the notices issued by the Income-tax authorities, Budget 2015 originally proposed to carve out certain capital gains earned by FIIs from the levy of MAT. By implication, MAT could have been levied on (i) other foreign investors and (ii) other income earned by FIIs. Since the amendment has been proposed with effect from 1 April 2015 (and, unfortunately, not retrospective), by implication, controversy around applicability of MAT for past years continues.

However, at the time of moving amendments to the Finance Bill, carve out from levy of MAT has been extended to all foreign companies qua capital gains on transactions in securities, interest, royalty and fees for technical services where such income is credited to the profit and loss account and, is chargeable to tax at a rate lower than the MAT rate. Therefore, generally speaking, with effect from 1 April 2015, income of a foreign PE Fund by way of capital gains on sale of securities or interest, chargeable to tax at a rate lower than MAT, ought not be subjected to MAT. This should be irrespective of the jurisdiction in which the Fund is domiciled.

The Government has swiftly reacted to adverse reactions from the foreign investor community. The Central Board of Direct Taxes has issued communication to the Income-tax authorities imploring them to dispose-off treaty claims of FIIs expeditiously (within one month of such claim). Further, the Government has constituted a high-level Committee to resolve the issue for past years. The Board has also issued an instruction directing the Income-tax authorities not to take any coercive action for recovery of demands and not to issue further notices unless such notices are getting time-barred.

To conclude, as the Government “walks the talk” on issues such as providing a stable and non-adversarial tax regime, this will assist in improving the investment climate.

(Nehal Sampat is Executive Director, Private Equity – Tax at KPMG)


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1 Comment
Chetan Kakariya . 2 years ago

Very informative article !!

Minimum Alternate Tax on foreign investors: A MATerial impact

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