FPIs skip applying for treaty exemption on MAT

June 11, 2015, Foreign Portfolio investors (FPIs) have decided to not file an application seeking exemption from the Minimum Alternate Tax (MAT) by citing DTAAs (Double Taxation Avoidance Agreements). FPIs decided to not apply for an exemption because of the uncertainty over whether an officer who received such an application had the power to withdraw his order (the tax demand), said a source with direct knowledge of the matter. Besides, appeals on the matter were pending before the Dispute Resolution Panel (DRP). Relief was also expected from the A P Shah committee, set up to study if MAT can be levied on FPIs.

Patrick Pang, Managing Director of the Asia Securities Industry & Financial Markets Association, which has FPIs of Asian markets as members, said FPIs need to take the DRP route due to lack of provisions to retract assessment notices. "Once issued, there is no specific ability for tax assessment notices to be retracted. Therefore, FPIs who had received such notices (even if they are from favourable tax treaty jurisdictions) will find that they will have to go through the DRP process. This is despite the fact that the ministry subsequently issued a clarification that tax treaty applies. There is no process for such FPIs to apply for treaty relief pending the DRP. Obviously, after the ministry clarification on tax relief, we should not expect to see any more tax assessment notices issued to treaty-relief FPIs." DTAAs with nations such as Mauritius and Singapore specifically exempt FPIs from paying capital gains tax, leading to a relief on MAT. The government had announced on April 27 that institutions based in treaty jurisdictions can apply for an exemption and a decision would be taken within a month.

"Since the issue involved in such cases is limited, such claims should be decided expeditiously," said the government notification. "It has, therefore, been decided that in all cases of Foreign Institutional Investors seeking treaty benefits under the provisions of the respective DTAAs (Double Taxation Avoidance Agreements), decisions may be taken on such claims within one month from the date such claim is filed… officers concerned have been directed accordingly." However, applying for exemption under DTAAs has not been seen as a viable solution. Interestingly, a tax official said officers were free to modify an order until it was signed, based on the response of the entity to whom the notice was sent. If officers had declined to do so, it might be out of ignorance. "We had given a way for FPIs to seek relief from MAT demand. But if FPIs want to take legal recourse, it is entirely up to them," said the person.

In the case of a draft order, said another person familiar with the matter, the tax officer concerned had the power to revise it only if there were apparent mistakes in the order, based on the material on record. Taxing a foreign investor would be a considered position taken on levying MAT on treaty jurisdiction entities, he said. "It is not entirely clear if this can be revised based on an application and a rectification order. There is ambiguity. DRP may be the appropriate forum," added the person. Two of the top three nations from which India receives foreign portfolio flows, are treaty jurisdictions - US, Mauritius and Singapore. Foreign investors looking for a resolution might wait for a decision of the DRP, the judiciary or the A P Shah committee. Officers had been asked to put actions on hold while the committee looks into the issue. Cases are pending in DRP and the Bombay High Court, in addition to a clarification being awaited from the Supreme Court.

MAT was originally introduced in 1987. Many companies made significant profits but paid minimal taxes on account of various exemptions. The MAT provision required all companies to pay a minimum tax of around 20 per cent, irrespective of the exemptions. Recently, the tax department had taken a view that this will also be applied to foreign portfolio investors, effectively raising their tax liability from as little as Zero Per cent to 20 Per cent. This was based on a ruling by the Authority for Advance Rulings in a case involving Castleton Investment. The matter is now pending in the Supreme Court. The tax department had issued notices to 68 entities for a claim of Rs 602.83 crore, according to an April 24 government statement in Parliament.