A recent tax notices demanding tax at 20 per cent on interest income from Foreign Institutional investors (FIIs), as opposed to 5 per cent without minimum alternate tax (MAT) has shaken the investors.  

To encourage investment in government securities, the withholding tax reduced from 20 per cent to 5 per cent in May 2013. The strategy worked out and many of the foreign investors turned to India with investment purpose.

With the announcement of the Indian Tax Department asking Foreign Institutional Investors (FIIs) for Rs 40,000 crore in taxes, the stock markets have been on the downside. FIIs net sold stocks worth about Rs 1,750 crore, pulling down the sensex to a three-and-half month closing low at 27,177.

After the new government had clearly stated that Minimum Alternate Tax (MAT) will be abolished from April 1, 2015, this tax demand was not expected and it turned to be a shock for the investors.

The Rs 40,000 crore demand is a tax pertaining to years before Finance Minister Arun Jaitley announced scrapping of MAT. But the actual tax liability of foreign investors towards MAT may be much lower than Rs 603 crore. The reason behind this is as many of them would get the benefit of double taxation avoidance acts.

Those FPIs based out of other countries, including Australia, UK and the US, which have DTAA with India would be eligible for treaty benefits once they provide the tax authorities with residency proof.

“FIIs from Cayman Island, Hong Kong and BVI may however continue to be hit by the MAT provisions as India does not have a tax treaty with these countries.

Lots of confusion aroused regarding payment of MAT by the countries having treaty with India and countries who does not have any such treaty. Domestic tax law applies only to the extent it is beneficial over the Treaty. MAT should therefore not apply to FIIs based in treaty countries.

As per F. No. 500/36/2015- FTD.I, the Central Board of Direct tax (CBDT) has decided that in all cases of foreign institutional investors (FIIs) seeking treaty benefits under the provisions of respective DTAAs, decision may be taken on such claims within one month from the date such claim is filed.

However, countries which does not have any treaty regarding the said issue will have to pay MAT @ 20 per cent.

The matter of imposing MAT was evolving around the case of Castleton Investments, wherein the Authority for Advance Ruling (AAR) gave a verdict in August 2012, that Castleton is liable to pay MAT when it transferred shares from a Mauritius entity to a Singapore entity.

ICI Global reminded the government that FIIs were never taxed through MAT after they were allowed to invest in India in 1993. As the issue is in the limelight, the investors are nervous and are heading towards taking out their money from the government securities in India.

Imposing of MAT raises question about the investment strategies in India. With this uncertain tax regime, a question mark arises in the mind of investors regarding their priority for investments in India. Though few countries enjoy the benefit of tax treaty with India, even then doubt about the stability in India will arise. The investors from other countries will automatically reduce due to such issues.

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