The applicability of the Indian Minimum Alternate Tax (“MAT”) provisions to foreign companies has long been a controversial issue. Whilst there are strong arguments to contend that MAT should not apply to foreign companies, which do not have a ‘place of business’ in India and, accordingly, are not required to maintain books of accounts in India, the issue has come in the forefront again in wake of the recently concluded tax assessments of Foreign Portfolio Investors (“FPIs”). In these assessments, MAT has been imposed on the income earned by the FPIs in India.
This Alert captures the controversy leading to the tax assessments and how KPMG can help FPIs involved in the controversy with the Tax Authorities.
Foreign Institutional Investors in India
The investment by foreign investment funds on the Indian Stock Market requires a specific regulatory authorization, the FPIs. In India, FPIs invest mainly in Indian listed securities and their profits consist in interest, dividends and capital gains.
Minimum Alternate Tax
The concept of MAT was introduced to provide for the levy of tax on the book profits of certain companies. Predominantly, the intent was to levy MAT on domestic companies having high book profits, but which were not paying taxes due to the availability of tax exemptions, deductions, etc.
MAT is a tax levied based on the book profits of the company, where the overall tax paid by the company is less than 18.5% of the book profits. Section 115JB of the Indian Income-tax Act, 1961 details the provisions of MAT.
Castleton Ruling - The Catalyst?
In the case of non-residents without permanent establishment in India, Courts have traditionally held that MAT is not applicable, since they do not maintain their books under the Indian Companies Act.
However, the Authority for Advance Rulings (“AAR”) held in the case Castleton Investment Limited that MAT would apply to a foreign company having no presence in India. This was a departure from the view taken in the earlier rulings of the AAR.
A Special Leave Petition challenging the Castleton ruling has been filed with the Supreme Court and is pending. It is learnt that the Government and the concerned parties have agreed to accelerate the hearing for early resolution. Foreign Investors are also considering the option of intervening at the Supreme Court when the Castleton matter comes up for hearing in order to present their set of arguments as the ruling will have a far reaching effect on the whole foreign investor community. It needs to be seen how the Supreme Court will decide in the Castleton Investment Limited case, and whether it would address the question of retroactive application of MAT rules to FPIs.
Amendments in the Indian Budget 2015
In an attempt to clarify the controversy and rationalize the MAT provisions, the Finance Bill 2015 proposes to prospectively (1 April 2015 onwards) amend the existing provisions of MAT to exclude from computation of book profits the income of FPIs from capital gains arising on transactions in securities (other than short-term capital gains).
However, the amendments fell short of providing the desired clarity on the principle issue of whether or not MAT provisions cover a foreign company.
Rather than providing explicitly that MAT provisions shall not apply to foreign companies, the proposed amendment only provided the specific item of income of FPIs to be excluded from the MAT computation. This created a lot of uncertainty and anxiety in the foreign investor community. After considering the recently introduced Amendments to the Finance Bill 2015, it has been clarified that any income accruing or arising to any foreign company by way of capital gains from transactions in securities, interest, royalty or fees for technical services shall be excluded from the ambit of MAT i.e., by excluding both the income and corresponding expenses in the computation.
It is important to note that these amendments are proposed to be applicable with effect from 1 April 2015.
Tax Department’s change in stand on applicability of MAT to FPIs
In the light of the above, the Indian Tax Authorities took the view in the recently concluded tax assessments for the period from 1 April 2011 to 31 March 2012 that MAT should apply to income earned by FPIs incorporated as “company”. Accordingly, the Tax Authorities have considered income disclosed in the tax return as book profits and have taxed the same at 18.5 percent. As a result, tax notices resulting from MAT levy have been issued to such assessed FPIs.
Further, under the Indian Income Tax Act, the Tax Authorities are entitled to issue notices for reassessing/assessing income for the past 5 to 7 financial years, as the case may be. Accordingly, the Tax Authorities have already sent notices to certain corporate FPIs in order to re-open/re-assess past years’ tax returns. Primary reason likely being to assess and levy MAT, wherever applicable.
It was hoped that the Budget amendments would put the controversy to rest. However, the amendment, though well intended, has raised more questions rather than settling the controversy.
As per the amendments proposed in the Finance Bill 2015, the tax officers have interpreted that the proposed amendments apply only from 1 April 2015 onwards. As a result, MAT provisions should be applicable for past years.
Going forward also, in view of the proposed amendment to exclude specific items of income of FPIs from MAT computation, the applicability of MAT provisions to items of income not specifically excluded remains to be seen. Some clarifications in this regard are expected to be issued before the Finance Bill will come into force.
It needs to be seen how the Supreme Court will decide in the Castleton Investment Limited case and whether it would address the question of retroactive application of MAT rules to FPIs.
MAT provisions should be applicable to taxpayers that are registered/formed as corporate entities. It should not be applicable to non-corporate entities.
The impact on Luxembourg collective investment vehicles should thus vary depending on whether they take the legal form of SICAVs or FCPs. As SICAVs generally take the form of a corporate fund, whereas FCPs are contractual funds having no legal personality, MAT should currently be a concern only for SICAVs, although there is no certainty on this at this stage.
Treaty Protection: In the recently concluded assessment proceedings, MAT has mostly not yet been invoked in the case of FPIs being tax resident of countries with favorable tax treaties i.e., treaties exempting taxation of capital gains in India.
Based on information at our disposal, we understand that going forward also, the provisions of MAT would not apply to FPIs investing from favorable tax treaty countries.
The India-Luxembourg tax treaty should not apply to Luxembourg collective investment vehicles investing directly into Indian listed securities.
Way forward - How we can help?
For further information, please do not hesitate to contact us.
Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.