Voices raised by FPIs against MAT Payment

Notices demanding MAT payment by FIIs on capital gain may lead to a battle between Foreign Portfolio Investors (FPIs) and the Tax Department. To challenge the applicability of Minimum Alternate Tax (MAT) on capital gains arising from trading in stocks and bonds, five FPIs have joined hands. The said FPIs are from UK and US who received demand notice about two months ago.   image1

This team of FPIs plans to file a writ petition in Bombay High Court on Thursday. Harish Salve, corporate India’s go-to lawyer in tax cases, would represent the FPIs. Khaitan & Company, a corporate law firm, is the advocate on record.

This brawl will definitely lead to flew of FIIs from India. Such notices has hampered reputation of India in international market.

Before the tax department started sending notices to FPIs to pay MAT, the tax experts believed that MAT was not applicable to foreign Companies that do not have a permanent establishment in India. Thus, they are not required to draw up their accounts as per the Companies Act and therefore, MAT shall not apply.

On the other hand, the Tax Department relied upon the ruling given by the Authority for Advance Rulings (AAR). As per AAR, MAT was applicable to the foreign companies.

In the Budget Speech, the Finance Minister announced that MAT would not apply to FPIs from April1, 2015. Thus, the draft assessment orders demanding MAT was sent to FPIs by 31st March itself. Subsequently, for FY 10 and 11, notices were sent in first week of April.

Though to clarify on some issues, CBDT issued a Circular regarding the decision shall be taken within a month for FIIs who enjoy benefit of treaty with India, many consider this as a vague order. This is due to it does not mention the word MAT or tell tax officers what action should be taken in this regard.

Now, the writ to be filed tomorrow may actually clear doubts on this issue. Whatever the decision comes out of this, impact of this may be seen in the form of FIIs opting out their money from India.

Government shall come up with a clear tax regime. Such confusion will result in low confidence in India and will ultimately affect foreign exchange inflow.

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