The government has sent out a strong message to foreign investors seeking MAT relief. Taking a tough stand, Finance Minister Arun Jaitley Monday said India was not so vulnerable that every legitimate tax demand will be waived.
Tax authorities are said to have served notices to foreign institutional investors over unpaid Minimum Alternative Tax (MAT) of the previous years, triggering protests from the overseas investors. Jaitley said India was not a tax haven and that taxes that were payable by foreign investors should be paid, and others could be challenged.
Mukesh Butani, Chairman of BMR Advisors, said that MAT levy is largely applicable to Indian companies and FPIs do not come under its scanner. Hence, the FPIs have been seeking clarification from the government over the issue, he said.
Below is the transcript of Mukesh Butani's interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.Reema: The BJP government came to power with a states position of providing fair, stable as well as non-adversarial tax regime but yesterday the IT department has issued fresh minimum alternate tax (MAT) demands on foreign portfolio investors (FPIs) for the prior years. How do you read this development? Is it legally tenable and would it constitute a fair tax regime?A: Two aspects – one, the general statement that was made by the finance minister as a part of the larger agenda for this government that they believe in non-adversarial administration. I think towards that objective the government has done a lot to be able to clarify the law. If you try and mix up with this debate on MAT levy for FPIs and foreign institutional investors (FIIs) – that is a different argument. I think what the government is trying to say is that this is a debatable issue and the taxpayers will have to fight it in the court and this is not tax terrorism of any kind but, what is important is this debate whether the clarification in the finance bill of 2015 was seeking an exemption by the FPIs from the levy of MAT or was it seeking a clarification. The way I read it is that if you look at the MAT law of 1996 which was subsequently amended in 2000 and 2002. The MAT levy was targeted towards companies that have zero tax profits and book profits and who declare dividends. So it applies to largely Indian companies seeking tax benefits, having booked profits and declaring dividends. Historically foreign companies, particularly foreign companies that do not maintain books of accounts and FPI would be classified as a foreign company for Indian tax purposes do not declare dividends, do not claim tax exemption, have a specified basis of taxation so on. MAT levy should not apply in their case also the FPI regulation for taxability has been there since 1993. So it is unprecedented in the first place that the tax administration has started levying MAT on FPIs. This practice for something that is a recent phenomenon, so I guess the FPIs wanted to seek a clarification which the finance minister as benevolent enough to provide that clarification but I do not think it is an exemption of any kind. I think it’s a clarification and the government should have simply stated in the Budget that there is no question of levy of MAT on FPIs and this whole debate would not have arisen. So the legal position which in my view, the stand of the tax administration is untenable is that there is there is no question of levy of MAT on FPIs. The question here is if the government doesn’t clarify that, it will have to be tested in the court.
Sonia: That is the thing; there is no clarity that has come through after the government’s statements yesterday. In fact the revenue secretary, Shaktikanta Das did day that the law will naturally apply for a prior period. So, if the foreign institutional investors (FII) and foreign portfolio investors (FPI) do not get this retrospective exemption then how much do you think that the FIIs sentiment could be hit going forward?
A: As I had mentioned, I do not think that the FPIs are saying that they want an exemption on a retrospective basis. What they are trying to say is that the law should be clarified that there is be question for levy of minimum alternate tax (MAT) and really this is the fundamental difference between what the government has understood and it is trying to say that we cannot allow you exemption on retrospective basis versus what the stand of FPIs and FIIs is that there is no question of levy of MAT. Now, if the tax department goes ahead and levies MAT which is what seems to be the case, I think the FII sentiment would be low because you have an FII which is seeking for certainty and stability and so far as tax levies is concerned, historically there have been no question of levy of MAT.
So, if this bogey has arisen in the recent past, that is not something that they are going to like it. Let me give you another illustration, in this year’s Budget, the tax withholding on interest on government securities earned by FIIs has been dropped from 20 percent to five percent. Now if the levy of MAT position is sustainable then what we are trying to tell the FPIs is that we will levy five percent withholding tax on government securities but when it comes to final computation of tax we could levy MAT up to 18 and a half percent. Now, this is a terribly incongruous kind of a position that has arisen. So we need to go back to the basics of the law. We need to look at the 1993 law, how FIIs were liable for taxes. We need to look at the MAT levy and the purpose of the MAT law of 1996 and a concurrent reading of both the laws will lead to a conclusion that FIIs and FPIs are not liable for MAT levy. But, if this controversy has arisen, there are two options for the government. One option which the finance minister talked about yesterday, go and test out the proposition in the court. He is not stopping FPIs from doing that and second option is for the government to clarify that there is no question of levy of MAT. I do not think that there is any other third option to be able to come out of this controversy. But to the first statement that you made, I would not attribute the statements made by the finance minister yesterday as going away from the promise of this government to have a stable tax regime.
Reema: Just to simplify it for our viewers, it is quite likely that this battle is now going to be fought in the court and over there based on the legal position, it is possible that the final verdict could go in for the FPIs and they will not have to pay this MAT demand at least for the prior years because they do not book profits and they do not declare dividends as per the pure definition, right?A: You are correct. If the government does not clarify then I think FPIs will have to resort to court and my personal view is that this is an untenable position and the plain reading of the law suggests that there is no question of levy of MAT and I hope that the court is convinced with that argument. Reema: Has not the government already collected for 2012 and they were going to give these demands for 2009 or something? So, if the law does go in favour of the FPIs, will the government refund the money there? A: No doubt about it. Of course if there is a court order, they will have to go through the normal process of dispute resolution panel and then the tribunal. So, if the verdict is in favour of the FPIs, of course the refund will be granted by the government.Sonia: What is the estimates of the aggregate MAT that needs to be paid by the FIIs, a sort of a ball-park estimate?A: I do not have that figure. It will all depend on the number of assessment orders that have passed and the demands that are raised. I would imagine that most of the FPIs would be filing their returns subjecting themselves to the jurisdiction of Mumbai and it is only the income tax department in Mumbai that would have all the figures as to how much demands they are raising as a result of MAT levy on FPIs.
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