New Delhi: With the government deciding to exempt the foreign companies that have no permanent establishment in India from the 18.5 percent minimum alternate tax demands, all foreign investors have got full relief from the controversial MAT.
The finance ministry’s clarification this week puts the MAT controversy to rest as all foreign investors without business presence in India – foreign portfolio investors and companies – are now exempt from MAT, irrespective of whether tax treaties exist between India and other countries where these firms may be domiciled.
Technically, the ministry of finance has decided to amend the Income Tax Act, 1961, with effect from April 1, 2001, in a manner that provisions of Section 115JB shall not apply to a foreign company if it is a resident of a country which has a double taxation avoidance accord with India.
In cases where the country of domicile of the foreign company does not have a tax accord with India, this exemption shall not apply, provided the Companies Act, 2013, exempts it from having a registered office in India. In both cases, the foreign companies also should not have a permanent establishment in India.
“The decision to amend the Income Tax Act on non-applicability of MAT is a welcome step as it would remove ambiguity and encourage foreign investments into the country,” Girish Vanvari, head of tax at international accounting firm KPMG in India, said on Friday.
“What is more heartening is the speed with which the government has acted,” he said.
“An appropriate amendment to the Income Tax Act in this regard will be carried out. Earlier, issues relating to taxation of foreign companies, having no permanent establishment in India, have been under consideration of the government,” an official statement said on Thursday.
The amendment is important in terms of minimum alternate tax called for by the Income Tax Act, which seeks to bring under the tax net companies that declare substantial profits in books but show their taxable incomes below what is otherwise due.
Earlier, a similar concession was extended to foreign funds from April 1 this year.
The concession to the foreign funds was extended based on the recommendations of the A.P. Shah Committee. The government has extended it to foreign companies as well.
In the 2015-16 Budget, Jaitley exempted FIIs from paying MAT with effect from April.
Even after Jaitley’s announcement, the Income Tax department sent notice to at least 90 foreign portfolio investors.
With the uncertainty created by MAT, foreign investors sold Indian shares and bonds of around $630 million on May 6, marking the biggest single-day sale since January 2014.