New Delhi: Foreign companies without a permanent establishment in India will be exempt from minimum alternative tax (MAT), the government said on Thursday, a move that will assuage concerns of overseas investors.

This, along with the government’s earlier decision to exempt foreign portfolio investors (FPIs) from the MAT levy even for the period prior to 1 April, is expected to completely put to rest the controversy over the tax that contributed to a selloff in Indian stocks in April.

The controversy erupted after the income-tax department issued notices to more than 50 foreign portfolio investors to pay MAT. Foreign investors opposed these notices, arguing that MAT can only be levied on book profits, which they do not maintain in India. In May, finance minister Arun Jaitley tried to address investors’ concerns by setting up a panel led by justice A.P. Shah to study and clarify the issue. The committee recommended that MAT cannot be levied on foreign portfolio investors as well as foreign companies who have no permanent establishment in India.

The government will now amend section 115JB of the income tax Act to ensure that MAT provisions are also not applicable to a foreign company that does not have a permanent establishment in the country and is a resident of a nation having a double taxation avoidance agreement (DTAA) with India, the finance ministry said in a statement. The act will be amended with retrospective effect from 1 April 2001.

While the government’s earlier move of exempting FPIs from MAT placated capital market investors, Thursday’s announcement addresses long-term investors such as private equity and venture capital firms, said Sameer Gupta, tax leader for financial services, EY India.

“Long-term investments under the foreign direct investment and foreign venture capital investment routes are typically done from offshore jurisdictions. These investors do not have any permanent establishment in India and should get relief," said Gupta.

“What is to be seen is if these amendments are taken up and pushed through in the winter session of Parliament itself, as indicated by the government earlier this month, he added.

According to the finance ministry, in case a foreign company is a resident of a country that does not have a DTAA with India, MAT will not be applicable on the company if it is not required to seek registration under certain sections of the Companies Act 2013.

Analysts said this removes all ambiguities over levy of MAT for the previous years and encourages foreign investors—both portfolio and long-term investors—to invest in India.

In this year’s budget, finance minister Arun Jaitley exempted foreign companies’ capital gains from the sale of securities, interest income, royalty and fees for technical services from MAT. However, this exemption was effective only from 1 April 2015, thus leaving many of the private equity and venture capital investors, debt funds and other foreign companies exposed to MAT demands for the previous years.

MAT is a tax levied on profit-making entities that don’t pay corporate income tax because of exemptions and incentives. The income-tax department had demanded MAT from foreign investors on capital gains accruing to them from the sale of shares, citing an August 2012 order by the Authority for Advance Rulings in the case of Castleton Investment Ltd that MAT is applicable to both domestic and foreign companies.

“This (Thursday) circular comes as a relief. Hopefully, this puts to rest most of the litigations of the past years; the future has already been addressed through amendments in the law," said Ketan Dalal, senior tax partner, PwC India, in a note.

Now that the government has taken a stand on this issue, analysts expect it to inform the Supreme Court, which is hearing Castleton Investment’s plea against the income-tax department, about its decision to not levy MAT on foreign companies.

“Castleton Investment Ltd is a Mauritius-based foreign company which has no PE (permanent establishment) in India. Also, India has a DTAA with Mauritius. This should exempt the company from levy of MAT and the government should inform the Supreme Court about its stand and put this matter to rest," said an analyst who did not wish to be identified.

The next date of hearing in this matter in the Supreme Court is 29 September.

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