Shah committee backs MAT relief for foreign investors

The govt signalled it may accept the recommendations, a step that could help restore investor confidence in India's tax regime

New Delhi: A committee headed by A.P. Shah, chairman of the Law Commission, has suggested sparing foreign portfolio investors (FPIs) from minimum alternate tax (MAT) for the years prior to 1 April 2015, offering relief to overseas funds that had been concerned about retrospective taxation on capital gains.

The government signalled that it is inclined to accept the recommendations which, if it does, could help, at least partly, restore investor confidence in India’s tax regime that has been shaken by a series of tax disputes.

“The A.P. Shah committee has recommended giving relief to FPIs with regard to levy of MAT for the period prior to 1 April 2015. The government is favourably considering this," a finance ministry official said on Friday on condition of anonymity.

If indeed the government does extend relief, it would bring closure to an ugly dispute between foreign investors and the revenue department.

“This would restore confidence amongst the foreign investors and would be another step for the government to tell the world that they mean business and (are) willing to quickly bring in certainty on critical issues," said Girish Vanvari, national head of the tax practice at KPMG. “However, the exuberance could be higher if MAT is removed for all foreign companies (whether FII or not)."

The government’s position on the issue will become clear when it spells out its stand in the Supreme Court on a case filed by Castleton Investment Ltd against the tax department over MAT. Hearings on the case were scheduled to start on 4 August, but were postponed to 29 September after the government sought time to study the recommendations of the Shah panel report and finalize its stand.

MAT is a tax levied on profit-making entities that don’t pay corporate income tax because of exemptions and incentives.

The tax row started after the income-tax department started demanding 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 (AAR) in the case of Castleton Investment that MAT is applicable to both domestic and foreign companies.

Foreign investors opposed these notices, arguing that MAT can only be levied on book profits, which they do not maintain in India.

The government appointed the Shah panel to defuse the row that threatened India’s image as an investment destination and dented the credibility of the National Democratic Alliance government’s pledge to end “tax terrorism" and enforce a fair tax regime.

The government will send a positive signal to the investor community if it opts not to prolong the case and end the dispute once and for all, like it did in the transfer pricing cases related to share transfers involving Royal Dutch Shell Plc. and Vodafone Group Plc., said Sudhir Kapadia, partner and national tax leader at consulting firm EY.

“The government, through a cabinet resolution, decided not to appeal against an adverse high court ruling in a transfer pricing case involving share transfers. In this case also, it can decide to instruct its field officers not to pursue the matter. It can also submit the A.P. Shah panel report to the Supreme Court bench hearing the case and say that they are agreeable to accept the recommendations," he said. “This will send a strong signal to investors that it does not wish to unnecessarily prolong a dispute."

The Shah committee was mandated to examine all related legal provisions and previous judgements to decide if MAT could be levied on foreign investors.

The committee submitted its report to the government last month, but it hasn’t been made public yet.

The 66-page report was unanimous, Shah, a former Delhi high court chief justice, said, adding that the panel had sought the views of various industry bodies, consulting firms and the Central Board of Direct Taxes.

“We have examined the issues. There was some inconsistent judgement of AAR and ITAT (Income Tax Appellate Tribunal). We have examined the legal issues, the working of FIIs (foreign institutional investors) and the report takes a holistic view on the matter," Shah said last month.

Besides Shah, the other members of the panel were Ashok Lahiri, former chief economic adviser to the finance ministry, and Girish Ahuja, former associate professor of commerce at Shri Ram College of Commerce, University of Delhi.

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