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A file photo of the Supreme Court. Photo: Mint
A file photo of the Supreme Court. Photo: Mint

MAT impact for foreign companies hinges on SC verdict

Judgement in Castleton case will determine if foreign firms get any reprieve for the period prior to 1 April 2015

New Delhi: Uncertainty on the levy of minimum alternate tax (MAT) continues for foreign companies, with the government deciding to only exempt foreign portfolio investors (FPIs) from this levy for now.

On Tuesday, accepting the recommendations of the justice A.P. Shah panel, the government announced that it will amend section 115JB of the Income Tax Act to exclude FPIs from the ambit of this tax. It will also instruct field officers of the income tax department to not pursue new or existing tax demands from FPIs.

However, analysts point out that foreign companies will have to wait for a judgement in the Castleton Investment Ltd case pending in the Supreme Court, where the foreign company has challenged the tax department over the levy of MAT, to get any possible reprieve for the period prior to 1 April 2015. The case is due to be heard on 29 September.

While moving amendments to the finance bill this year, finance minister Arun Jaitley had 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.

“There was a huge uproar when the income tax department started sending notices to FPIs. The government had to act fast to send the right signals to the international investor community and hence, they set up the A.P. Shah panel to examine the applicability of MAT to FPIs/FIIs (foreign institutional investors). A similar situation can be apprehended if the tax department starts issuing notices to foreign companies," said Daksha Baxi, executive director at Khaitan and Co., a law firm.

She added that the government may have not included levy of MAT on foreign companies in the ambit of the Shah panel since the matter was pending before the Supreme Court.

“The decision of the Supreme Court in the case of Castleton, if it discusses and rules on all the issues pertaining to foreign companies, should bring certainty in that regard too," she said. “In case the Supreme Court does not have the opportunity to rule on all the issues, then the government may have to either form another committee or if the A.P. Shah committee is still functional, appoint them to deal with all the issues relating to the applicability of MAT to foreign companies," she added.

Sunil Jain, partner at J Sagar Associates, said the content of the Shah panel report will give a lot of ammunition to Castleton when it argues its case in the Supreme Court.

“The arguments given by the panel can be applied for every non-resident and foreign company. Except for one or two instances in the report, the panel favours exempting foreign companies from MAT though they are not recommending it since it was outside the ambit of the terms of reference," he said.

The Shah panel report, which was made public on Tuesday, had said that if section 115JB was applicable to foreign investors, they would require to compile their global accounts in accordance with the Companies Act. However, such an obligation is absent in the legislative intent, as there is no method provided for any computation mechanism for foreign companies’ book profits, the report pointed out.

Both FPIs and long-term investors such as private equity funds do not maintain their books of accounts in India.

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