Home / Politics / Policy /  FIIs want amendment to tax law to be retrospective

New Delhi: This time, it’s the lack of retrospectivity of an amendment to tax laws that has irked foreign investors.

The government’s decision to exempt capital gains accruing to foreign institutional investors from minimum alternate tax (MAT) will only apply prospectively and the income tax department has no plans of extending this provision to past years, senior government officials said. This could prolong the litigation between the tax department and foreign institutional investors (FIIs).

The tax department issued a number of notices to nearly 90 foreign portfolio investors (FPIs, another name for FIIs) to pay MAT for assessment year 2012-2013 over the past few months and is expected to broaden its net to include 6,000 more. These investors contend that they are not liable to pay MAT since they do not maintain a book of accounts in India.

Finance minister Arun Jaitley, in his budget speech, sought to clarify this. “In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT," he said. But this will be applicable only prospectively—from financial year 2015-16.

“The provision in the bill specifically says it will apply prospectively. There are no plans to extend it to past years," said a senior government official, who did not wish to be identified.

In 2012, foreign investors criticised a retrospective amendment to tax laws announced in the budget by then finance minister Pranab Mukherjee.

A tax expert, who was present at meetings held on Monday and Tuesday between tax experts (on behalf of FPIs) and income-tax officials in Mumbai, said the tax department has indicated that it will reopen old cases for assessment years before 2012-13.

Right now the notices being sent out are for assessment year 2012-13 (which has to be completed before 31 March). Nearly 90 FPIs have been issued notices under Sec 139 (9) of the Income Tax Act for a sum of over 1,000 crore. All 6,000 FPIs will receive such notices. In addition, the income tax department has also selected cases for scrutiny for assessment year 2013-14, the tax expert, who did not wish to be identified, said.

The Economic Times reported the notices on Wednesday.

“Given that the finance minister has clarified that MAT will not be applicable on capital gains accruing to FIIs, ideally the income tax department should provide a guidance to the field officers to refrain from levying MAT on such transactions for the previous years," said Sudhir Kapadia, partner and national tax leader at EY, the auditing and consulting firm formerly known as Ernst & Young.

“With a case pending in the Supreme Court, the tax department is waiting to get clarity from the apex court on the applicability of MAT on foreign investors," he said.

Explaining the government’s stance at a post-budget interaction organized by industry lobby Federation of Indian Chambers of Commerce and Industry, revenue Secretary Shaktikanta Das said the issue arose after the Authority for Advance Rulings (AAR) gave an adverse ruling to the FII who had approached the AAR.

“The ruling was favourable to the department saying that MAT was leviable on the FII. When the AAR gives that kind of ruling, the income tax department officials are required to act upon it and several notices have been issued. Considering the difficulties and the representations that have come to our notice, the finance minister in the finance bill has included this provision whereby FIIs will now be exempted by MAT," Das said.

“The government has responded to a particular problem which was encountered by a certain class of tax payers and that problem has been resolved for the months and years to come."

The Union Budget proposed to exclude income of foreign portfolio investors in relation to capital gains (other than short term capital gains not subject to securities transaction tax) for the purposes of levy of MAT.

While the budget provided clarity on this issue by amending MAT provisions prospectively (from financial year 2015-16 onwards), it has left open a window for larger debate on whether FPIs were liable to MAT on their entire income till FY 2014-15, said Manoj Purohit, director, Walker Chandiok & Co Llp.

“Revenue authorities may seek to reopen the cases pertaining to earlier years, which will lead to enormous litigation. Thus, a clarification on taxation and levy of MAT on FPIs pertaining to prior years is needed. It would be injustice to the foreign investor community who are fully compliant with the domestic tax laws pay regular taxes and have only demanded clarity on taxation," he said.

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