Mumbai : Way back in 2002 income tax authorities discovered that the plethora of concessions in the Income Tax Act (ITA) that were introduced over the years had ended up rendering many incomes tax-free or tax deductible or earning huge rebates – thereby enabling corporates to bring their tax liability to a negligibly low, if not nil level. This, in spite of the corporate’s own profitability performance being excellent such that it distributed handsome dividends to its shareholders!! This started becoming more and more unpalatable to the authorities till one day at last MAT was introduced.
Minimum Alternate Tax or MAT was introduced through Sec. 115JB w.e.f. 1-4-2002 requiring all companies to pay Minimum Alternate Tax at a reasonable rate of as low as 7.5% of its book profit if the tax as per ITA worked out at lower than this level. The phrase ‘book profit’ means the net profit as shown in the P&L account prepared in accordance with the provisions of the Companies Act as adjusted by certain specified amounts. The extra tax arising out of the difference between the MAT and actual tax payable is treated as deferred tax, which, as and when the company becomes liable to actually pay any tax over the level of MAT as per the provisions of the ITA, can be adjusted and continue to be adjusted at least for 8 years or until it becomes nil, whichever is earlier
Over the years, this reasonable rate of 7.5% was slowly and steadily being made unreasonable by raising it to 10% (FA09), to 15% (FA10), 18% by FA12. The actual rate after taking cognizance of cess of 3% and surcharge of 5% (for companies) works out at 20.00775%.
Now, after fourteen years, the Department is taking a stand that MAT was and is applicable to Foreign Portfolio Investors or FPIs and foreign Private Equity firms (PEs) structured as corporate entities.
This stand appears to have ignored the fact that the budget speech related with the year of introduction of MAT as well as the accompanying explanatory memoranda had indicated that this Section will be applicable only to Indian Companies. Moreover, most of such companies are governed by the DTAA between India and the foreign country of which the foreign companies is a Resident. The local Acts of both the countries cannot override the provisions of the DTAA. Therefore, the income computed in accordance with the tax treaty cannot form a part of the book profits for applying MAT.
The Finance (No. 2) Act, 2014 amended Sec. 2(14) of the Act to characterise the securities held by FPIs as capital asset. This was a welcome move since the sale of listed securities is free from levy of Capital Gains Tax.
Almost all the income of any FPI arises from transactions in securities and the same would be in the nature of capital gains. Consequently, such companies, (assuming that MAT is applicable to them) would never be able to take advantage of the provision of the ‘deferred tax’ since their tax liability would never cross this current limit of 18.5%. Recognising this fact, the recent FA15 has amended Sec. 115JB so as to provide that income from transactions in securities (other than short-term capital gains arising on transactions on which STT is not chargeable) arising to an FII shall be excluded from the chargeability of MAT and the profit corresponding to such income shall be reduced from the book profit. The expenditures, if any, debited to the profit loss account, corresponding to such income (which will be excluded from the MAT liability) are to be added back to the book profit for the purpose of computation of MAT. So far so good!
But then come several negative aspects —
This amendment could have been better worded to say it does not apply to FPIs, rather than saying capital gains will not be subject to MAT. The FM, in his recent Budget speech had said that MAT would not be levied for investments of non-residents from 1.4.15. No one realised that, as he explained in one of his subsequent press conferences, that he is sticking to his promise of not making any amendments retrospectively. This tax isn’t retrospective – the stand of the authorities is that the tax was always applicable in the past, and hence it will have to be paid. Newspaper reports indicate that CBDT has already sent out notices to FPIs defaulting on such payment of MAT and the collective demand adds up at about Rs. 40,000 crore!
We feel that the fear and uncertainty surrounding the levying of taxes in general and MAT in particular will not auger well for the ‘Make in India’ campaign of the government. And the flood of litigations that this move may invite will not auger well for India’s image as an investment friendly destination. So by insisting on application of MAT is the government in a way killing the proverbial hen that laid the golden eggs? Only time will tell. Watch this space for updates.
The author may be contacted at wonderlandconsultants@yahoo.com
A N Shanbhag
