Photo: Mint
Photo: Mint

FPI MAT levy: CBDT instructs officials to put on hold all tax demands

CBDT decides to accept recommendations of high court that MAT cannot be levied on FPIs having no permanent establishment in India

New Delhi: In another move to reassure foreign investors, the income-tax (I-T) department has issued instructions to its field officers to put on hold all pending assessments and recovery efforts in cases involving levy of minimum alternate tax (MAT) on foreign portfolio investors (FPIs) for the period prior to 1 April.

This is consistent with the announcement made by finance minister Arun Jaitley on Tuesday.

In an instruction dated 2 September, the Central Board of Direct Taxes (CBDT) informed the field officers that the government has decided to accept the recommendations of the justice A.P. Shah committee that MAT cannot be levied on FPIs having no permanent establishment or place of business in India and will amend the income tax Act to this effect.

“The field authorities are accordingly advised to take into consideration the above position and keep in abeyance, for the time being, the pending assessment proceedings in cases of FIIs/FPIs involving the above issue. They are further advised not to pursue the recovery of outstanding demands, if any, in such cases," the instruction said.

The government will amend section 115JB of the Income Tax Act in the upcoming Parliament session to exempt FPIs/FIIs (foreign institutional investors) from MAT.

Jaitley, in this year’s budget, had exempted FPIs from levy of MAT but only from 1 April.

This retrospective exemption will be in addition to the relief provided earlier this year by Jaitley.

MAT is levied on the book profits of a company in cases where they do not pay any tax owing to various exemptions or deductions. Citing a ruling of the Authority of Advance Rulings in the Castleton Investment Ltd case, the I-T department had started issuing notices to foreign investors. FPIs, however, opposed the move stating that they are not required to maintain books of accounts in India and hence not liable to pay MAT.

After sustained opposition from foreign investors, the government backed down and decided to constitute a committee under Shah, a retired Delhi high court chief justice, to study the various legal positions and give its recommendations. This committee submitted its revised report on 25 August, which the government accepted.

The committee had pointed out that the provisions of the I-T Act relating to levy of MAT was never intended to tax FPIs who have no place of business in India. It had argued that there were no provisions in Indian laws that required these entities to maintain a book of accounts in India and hence could not be ask to pay MAT.

While this is expected to provide a reprieve to FPIs, foreign companies and other long-term investors like private equity and venture capital funds will have to wait for a Supreme Court decision in the Castleton Investment case for clarity on the applicability of levy of MAT on them.

Manoj Purohit, partner at law firm Walker Chandiok and Co. Llp, said that if the government wants to attract more foreign investments, it could look to broaden the scope of the amendment in the I-T Act now that it has stayed proceedings by the tax department in these cases.

“If the government wants, it can look at amending the income tax act to say that FPIs/FIIs and other foreign investors who have no permanent establishment in India are exempted from levy of MAT," he said.

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