The government would modify a contentious provision of the Income Tax Act to make it more transparent and move amendments in this regard in the winter session of Parliament, Finance Minister Arun Jaitley said. “I have accepted the A P Shah panel report submitted on Aug 25, 2015 … It said MAT would not be leviable on FIIs … a necessary amendment in provisions in section 115 JB of the I-T Act would be required and hopefully, we will bring that out in the winter session, or whenever the next Parliament session is held,” he said.
“We will issue instructions to field formations till the I-T Act is amended. The amended I-T Act will be more transparent,” Jaitley added.
A report by the Shah panel had suggested the government move towards certainty and predictability in the tax regime. “FIIs are mostly open-ended investment funds, which permit their investors to enter and exit daily, based on the NAV (net asset value) of the fund, unanticipated tax liability (or the fear thereof) relating to previous years, which would have to be borne by the current investors, maybe a sufficient trigger for the investors to exit,” it said.
In the 19 years since MAT was introduced (1996), it had never been levied on FIIs and foreign portfolio investors (FPIs). Instead, these entities were governed by the beneficial tax scheme under section 115AD.
The Shah committee said having an ‘established place of business’ was different from merely carrying on a business in India.
On Tuesday, Shah said the finance ministry’s move to accept the panel’s recommendations would send a positive signal to investors abroad. “There is commitment towards certainty in taxation. The fact that the government appointed this committee indicates it is committed to bringing clarity and certainty in the tax regime, and the report has now been accepted,” he said.
“This development will definitely cheer the investor community and help promote India as a favourable investment destination,” said Suresh Swamy, partner (tax & regulatory practice), PwC India.
Rajesh H Gandhi, partner, Deloitte Haskins & Sells, said the decision would help further the government’s position that it discouraged tax terrorism and welcomed foreign investment in India.
Earlier, the income tax department had sent notices to 68 FIIs, demandingRs 602 crore as MAT dues for past years. The issue relates to cases prior to April 1 this year. In Budget 2015-16, the government provided relief to FPIs prospectively, from this financial year.
Initially, the finance ministry was firm on retrospective MAT notices, saying India wasn’t a tax haven. However, in April, the government diluted MAT provisions, saying those coming from countries with which India had double-taxation avoidance agreements would be spared such notices. As the government persisted with other notices, five FIIs, including, BNP Paribas and London-based National Westminster Bank, moved the Bombay High Court against these notices in May. About 95 per cent of FIIs who received MAT notices from the income tax department approached the dispute resolution panel for relief.
On Tuesday, Jaitley said the legal recourse by certain FIIs would have been time-consuming. “We are of the considered opinion that the alternative course suggested by the Shah panel, that a necessary amendment in the Income Tax Act would be required ... (would be pursued),” he said.
Industry had argued provisions of MAT under the I-T Act were aimed at taxing companies that had to prepare profit-and-loss accounts according to the Companies Act. Foreign investors, it said, didn’t have a fixed place of business in India and, therefore, didn’t have to maintain books of accounts, in line with the Companies Act.
In 2012, the Advance Authority Ruling (AAR), Delhi, directed Castleton to pay MAT in India on its book profits. This followed the company transferring shares from a Mauritius entity to one in Singapore. An earlier AAR ruling had, however, said there was no case for MAT on FIIs.
Shah said AARs should be more consistent in their rulings. “Inconsistent rulings by AAR created a controversy about levying MAT on FIIs. When giving rulings, an AAR has to be more consistent and considerate.”
The Shah panel’s report would be made public soon, Jaitley said.
TURN OF EVENTS
February, 2015: In his Budget speech, FM Arun Jaitley says MAT not applicable prospectively
March: Tax dept sends notices on claims for earlier years
May: Five FIIs, including BNP Paribas and National Westminster Bank, move Bombay HC against MAT notices
June: A P Shah committee set up to examine past cases of MAT on FIIs
July: Panel submits report to FinMin
Sept: Finance ministry accepts report; to make amendments in section 115JB of I-T Act; amendments to be tabled in winter session of Parliament