Burying the MAT controversy

Amidst volatile stock markets on concerns of a weak Chinese economy and the imminent visit by Prime Minister Narendra Modi to the US to pitch for more foreign investments into India, the government last week issued a press release exempting foreign companies with no permanent establishment/place of business in India from paying the controversial minimum alternate tax (MAT) with a commitment to amend the law with retrospective effect from April 1, 2001.

This follows a similar press release issued earlier this month to exempt FIIs/FPIs from paying MAT on capital gains earned by them for periods prior to April 1, 2015. With this announcement, the government has addressed the concerns of an entire set of foreign companies with no PE in India — be it FII, FDI or FVCI — for the past years.

The key lessons As part of its election manifesto, the BJP had promised to end ‘tax terrorism’ and provide a non-adversarial tax regime for businesses and investors. However, within a year of coming to power, the MAT controversy threatened to decimate the BJP’s pre-election promise, as the tax department issued notices to FIIs seeking to levy MAT for past years. Mind you, MAT had been on the statute books for close to two decades but was never intended to apply to FIIs. The pre-requisite for levy of MAT is preparation of accounts under the Companies Act. Foreign companies such as FIIs who have no presence in India are not required to prepare accounts. The computational mechanism under the MAT provisions then fails, and therefore the charging provision becomes inapplicable.

However, buoyed by a private ruling of the Authority Advance Rulings (which does not create a binding precedent and which was also challenged in the Supreme Court) in the case of Castleton Investments, the tax department issued notices to several FIIs going back in time. Given the timing of the controversy, the right thing would have been for the government to amend the law in the Finance Bill, 2015, in February, with retrospective effect, clarifying that MAT does not apply to FIIs. The government seemed to justify the action of the tax administration and stated that while the FIIs would be protected from a MAT levy going forward, nothing could be done for the past years, leaving them to wait for the Supreme Court judgment in Castleton.

The FIIs were not going down without a fight. After all, they had no basis to go to their investors and demand tax going back several years. Litigation followed, with the FIIs filing a series of appeals, DRP objections and writ petitions. Several FIIs and their fund managers also joined as interveners (in the Castleton case). All this did not go down well with the pro-investment theme of the government. It appointed a committee under the chairmanship of retired justice AP Shah to examine MAT and recommend its applicability on FIIs for the financial years prior to 2015-2016. The committee submitted its report on August 25, 2015; it was released to the public on September 1, 2015.

The committee, in a 73-page report, noted that MAT provisions do not apply to FIIs not having a place of business in India. It recommended that the government amend the provisions to make it inapplicable to FIIs or clarify its inapplicability by way of a circular issued by the Central Board of Direct Taxes (CBDT).

Welcome circular The issuance of the circular is a welcome move by the Government. The immediate and more tangible outcome is that it should put an end to the controversy on MAT. But there is a deeper intangible message here, and that is that this government has its ear to the ground and is willing to find solutions through swift executive and/or legislative action. The key is to persist with this approach. The government must remember that capital market transactions require a high degree of tax certainty given that millions of transactions are conducted every day, affecting multiple market participants (funds, fund managers, investors, custodians, brokers).The markets will operate efficiently only if each and every trade has a predictable result for all market participants.

From the perspective of foreign investment and fund flows into the country, the developments on the renegotiation of the India-Mauritius treaty and the proposed GAAR law will again have a profound impact. How the government and the tax administration deals with this will be crucial in determining whether India remains a top draw amongst investors in attracting foreign flows.

The writers are with EY. The views are personal