Soon after the government accepted the suggestions made by the AP Shah Committee to exempt FIIs and FPIs from minimum alternate tax (MAT), Bloomberg TV India caught up with the panel head to get an insight on the landmark decision. Justice AP Shah elaborated on the reasons adopted by the Committee which led to a finding that there is little merit in levying MAT on FIIs even before April 2015.

What led the committee to suggest that MAT was not applicable on FIIs even before April 2015?

The issue that was referred to the committee was related to applicability of MAT to FPIs and FIIs prior to April 1, 2015. Our answer to that reference was that FPIs and FIIs are not covered by MAT provision that is under 115 JB (of the Income Tax Act). We clarified that we are not expressing any opinion on foreign companies which have a place of business or permanent establishment in India, as one of the reasons for holding that MAT provisions is not applicable to FIIs.

But the CBDT felt that our report may have an impact even on such companies. So, we gave a clarification that those issues are already covered and we are not expressing any opinion. In short, what we held was that in order to attract Section 115 JB provision, that is the MAT provision, a foreign company must be regulated by the Company Law regime. If Company Law provisions are not applicable to a foreign company which is not having a place of business then MAT is not attracted.

We recorded a categorical finding that FPIs and FIIs do not have a place of business in India and gave a detailed reasoning on that. Further, we said (in the report) that there is a fixed tax regime for FPIs and FIIs. Therefore, it could not have been intended that even such companies would be made to pay tax (under MAT provisions). The separate tax regime for FIIs is in existence since 1994 and before the advent of section 115 JB (of the Income Tax Act). So, taking into consideration all these factors we applied the logic given in different cases that they (FPIs and FIIs) are not covered under section 115 JB (of the Income Tax Act) because they are not governed by the regulatory regime of the Companies Act.

This report is limited to FPIs or FIIs. Has your panel recommended that the government should not have issued tax notices prior to April 2015 based on an ARR ruling?

We have not made any comment on the notices that were issued to various companies. Our recommendation to the government is that MAT provisions were not applicable to FIIs at all. So our finding is that prior to April 1, 2015 Section 115 JB was not applicable to FIIs. Our recommendation was two-fold — either CBDT should issue a circular, or Parliament can issue a clarificatory amendment to Section 115JB. It is for the government to decide what course of action it would like to adopt in order to resolve this issue.

Was there any recommendation with effect to the findings of the legislator and that it failed to specify the method of tax computation for FIIs and FPIs?

Section 115JB talks of the accounts being submitted under the Companies Act. It is a profit and loss account under the Companies Act. FIIs are not covered by the Companies Act. So, how would this competition machinery apply to the FIIs? How will you make it workable when Companies Act itself is not applicable to FIIs? So, in our opinion, FIIs are obviously not covered under the MAT provisions. And again, our recommendation was that we should move towards certainty and predictability in the taxation regime. It should not be so inconsistent that different rulings are given from time to time.

Taking this point forward, do you think that courts are giving inconsistent rulings?

Basically this is not about the court. These are the rulings given by the Advance Ruling Authority (AAR). Ordinarily, AAR ruling is binding only for the party which is seeking a ruling from the AAR. But this subsequent judgment indicates that it has a persuasive value and it is some sort of a guiding factor to investors abroad who want to invest in India. So there should be some sort of consistency in the AAR rulings or the overall taxation regime in India. I feel that the worry is more about the unpredictability and this government is very keen to send a message that this it is committed to the certainty in taxation.

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