Government has asked foreign portfolio investors (FPIs) to pay Minimum Alternate Tax (MAT), amounting to Rs 40,000 crore, for untaxed capital gains earned by them in previous years. Foreign investors, however, argue that they are foreign entities and are not liable to prepare their accounts in India and, therefore, not liable to pay MAT.
In an interview to CNBC-TV18, Sudhir Kapadia, Partner & National Tax Leader, EY shares his views on the same.Below is verbatim transcript of the interview:
Q: The government is sticking to its stance very clear. You will get exemption or you will get the benefit but that is from the current financial year. Wherever there are claims or notices sent to prior years you have got to pay up but here comes once again clarification from the tax authorities that treaty benefits can still be availed. How much of a help is this given the fact that several cases are anyway ongoing in order to ensure how much of treaty benefit is actually available to foreign investors?
A: Given the way this controversy has developed so far, this latest clarification is certainly helpful in as much as it clarifies what it is already stated position in the law in India that is where a treaty provides for a beneficial tax position, that should prevail over the domestic law provision.
A huge concern was apprehended when these notices first came into play whether a majority of institutions who do invest to take advantage of capital gains benefit under Mauritius and Singapore treaty, what would happen to their tax treatment for the past.
If the government has now clarified that the treaty benefits will continue to be available and the word is continue because they were always available in law, it is a welcome clarification, at least it sets to rest that part of the controversy.
This is obviously good as there are many funds that still come directly from their home countries, they don’t necessarily come via third country like Mauritius or Singapore especially institutional funds, pension funds, educating funds and they won’t get any relief for the past based on this clarification so for them it will be a legal battle to take it forward.
Q: But even if we just look at the funds that are coming in from some of these jurisdictions where there is a double taxation avoidance agreement, all kinds of figures have been doing the rounds, Rs 40,000 crore tax demand, to what extent is this current MAT bogey that we have seen and we have see that impact in the markets also play out with a lot of volatility, to what extent does it address the problem? Does it assuage let’s say 50-60 percent of the problem?
A: It is two things, one is the number of entities and the volume of the transactions, it is very difficult to figure out and revenue is the best repository of that working as to what exactly is the tax at stake because volume of transactions vary between FII to FII.
As far as the number of entities are concerned it is a known fact that quite a dominant part of the population does come through treaties and it has been so for 15-20 years now so if that clarification assuages that part of the population, that is good news but as I said it does not take away the controversy as far as the non-treaty country FII are concerned.
Q: What you get through Singapore, Mauritius is almost 80 percent. The finance minister is on record to say that they will get almost Rs 40,000 crore, the FIIs are all welcome to seek judicial recourse. India is not a tax terrorist but it is not a tax haven either. I want to talk to you little more about this Rs 40000 crore figure coming in post today’s conference call with FIIs, if they can get tax credit does this Rs 40000 crore figure hold any water at all?
A: I can’t comment on the figure, the ministry of finance would be the best repository of it. What I am saying is that as far as if these figures are correct – the 20 percent is to non-treaty countries – two aspects to be borne in mind, one is that the process and as the finance ministry themselves have clarified will be a long drawn process. It is not that this money will come into the government coffers overnight.
There is a process for nine months for the assessment to be finalised and confirmed by the dispute resolution panel, then there will be appeal. So, this kind of positioning to say that much needed money will fill the government coffers in the near future is not going to happen. It will be a long process in any case.
It is the technical point which is being made and that technical point has merits as far as the government is concerned, because they have the benefit of one or two decisions on this issue though not on FIIs but on this issue in the governments favour they want to test it out further at higher forums and that is what is being stated. Does it result in immediate revenue for the government? In my view the answer is no.
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