New Delhi: Moving to appease foreign investors, the government offered concessions on the applicability of minimum alternate tax (MAT) on Thursday, but stood its ground on not allowing them a retrospective exemption from the levy.

The move came a day after five foreign portfolio investors (FPIs) took the income tax department to court, challenging the notices issued to FPIs demanding the payment of MAT on capital gains. Their petition will be heard by the Mumbai high court on 6 May.

Foreign companies’ capital gains from the sale of securities, interest income, royalty and fees for technical services will be exempted from MAT, in cases where the tax rate is less than 18.5%, according to official amendments to the finance bill 2015 moved by finance minister Arun Jaitley and passed by the Lok Sabha on Thursday.

Jaitley, in his budget speech in February, had only clarified that capital gains accruing to FPIs from the sale of shares will not be subject to MAT from 1 April, but has now expanded its ambit.

This is expected to benefit private equity and venture capital investors, debt funds and other foreign companies, but only from 1 April 2015.

The government did not yield to demands by FPIs for a retrospective exemption from MAT, having assured them earlier that they can seek exemption from the levy under tax treaties India has with other countries, which would only benefit a limited number of investors who routed their funds from countries such as Mauritius, Singapore and the Netherlands.

The ongoing battle between the tax department and FPIs over levy of MAT, a tax paid by profit-making companies that do not pay corporate tax on account of incentives and exemptions, has raised questions about the Indian government’s ability to provide a stable and predictable tax regime to investors. Foreign inflows will be key to fund India’s infrastructure requirements as well as to finance the current account deficit and support the rupee.

While the tax department has issued demands to 68 foreign institutional investors (FIIs) for payment of dues totalling 608.83 crore, the total amount is expected to cross 40,000 crore, Mint reported on 27 April.

On Thursday, the finance minister also relaxed a clause on determination of tax residency of companies after foreign firms pointed out that even holding one board meeting in India may make these companies eligible to be taxed in India.

The government changed the provision defining “place of effective management," or POEM, to include even those companies incorporated outside India whose place of effective management “at any time" in that year is in India. Place of effective management was defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are, in substance, made.

Jaitley has now proposed to do away with the clause of “at any time" for determination of POEM.

To encourage sovereign wealth funds and funds of foreign governments and central banks to manage offshore funds from India, the government has also decided to do away with clauses on minimum number of investors and threshold limit of investment for such investors.

In this year’s budget, the government had proposed to modify permanent establishment norms to remove the adverse tax implications for such investors to manage these funds from India.

“All the amendments moved by the government are good for industry and will remove ambiguities and provide clarity," said Rahul Garg, leader, direct tax, at consulting firm PricewaterhouseCoopers. “MAT will not be levied on interest income received by FPIs. Also, royalty and technical fees that are taxable at a much lower tax rate of 10% will not be subject to MAT," he said.

“POEM has also now been made fully compatible to the OECD (Organisation for Economic Co-operation and Development) model," Garg said.

Jaitley has also sought to relax applicability of MAT on real estate investment trusts (REITS) and investment trusts. Gains and losses arising out of exchange of shares with the units of REITS and investment trusts have been exempted from MAT. MAT will now be applicable only on actual transfer of such units.

The clarification is unlikely to generate much interest in REITS, said Jasmeet Chhabra, managing partner, real estate private equity, Religare Global Asset Management, said.

“The contentious issue of MAT at the time of transfer of shares in lieu of REIT units continues, which will make such transactions expensive. This will hamper the ability of REITs to generate optimal returns, thereby making them less desirable and hence hamper development of a buoyant REIT market in India. This is unfortunate for the cash-starved real estate industry," he said.

Madhurima Nandy in Bengaluru contributed to this story.

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