Finance bill to bring curtain down on minimum alternate tax

Suresh SwamyThe Finance Bill to be tabled this month-end is expected to bring the curtain down on the minimum alternate tax (MAT) issue that had haunted the foreign portfolio investors (FPIs) since March 2015 when few FPIs were asked to pay MAT - essentially introduced long back to tax zero-tax dividend paying companies - following the interpretation in an advance ruling in Castleton Investments! During tax audit, MAT provisions were applied to corporate FPIs, effectively also taxing exempt long term capital gains, which snowballed into a major controversy.

The Government constituted committee, headed by Justice (retd.) AP Shah, examined the issue in-depth and recommended that MAT is not leviable on FPIs (i) which does not have a permanent establishment in India where the FPI is a resident of a country with which India has a tax treaty or (ii) which is not required to register with the Registrar of Companies where the FPI is a resident of a country with which India does not have a tax treaty.

The Dispute Resolution Panel (DRP) has directed withdrawal of the MAT levy on FPIsbringing cheer at the turn of the year. This is a clear indication of the Government’s resolve in implementing a stable and predictable tax regime for the FPIs - in which investors typically churn over time and the tax cost is factored on daily basis.

Another important amendment that the Finance Bill is expected to include is the recommendation of the expert committee on indirect transfer provisions headed by Dr. Parthasarathi Shome. These highly debated provisions seek to tax offshore transactions where the share or interest in a foreign company or foreign entity derives, either directly or indirectly, its value substantially from assets located in India. Unintentionally, the end investors in India focused/dedicated funds are likely to bear the brunt of these provisions. Ironically, such funds would need to perforce trim their investments in India so as to be out its purview - which would be contrary to the Government’s stance to boost foreign investments in India – going by the overwhelming response in the recently held Make in India event in Mumbai. An environment with tax certainty would go a long way to attract and retain foreign capital in India – surely not hot money!(The author is Partner – (Tax and Regulatory) Financial Services, PricewaterhouseCoopers Pvt. Ltd.)