India: Applicability of MAT to foreign investors

Rakesh Dharawat		Hariharan Gangadharan

In 2012, the Authority for Advance Rulings issued a ruling that India's book profit-based minimum alternate tax (MAT) applied to foreign companies. This ruling soon snowballed into a full-blown controversy with notices being issued by the tax authorities to several foreign companies engaged in making portfolio investments in the Indian stock market (foreign institutional investors (FIIs) and foreign portfolio investors (FPIs)). Although an amendment was made to the Income Tax Act as part of this year's Budget to clarify that MAT would not apply to foreign companies in respect of certain categories of income, this was prospective with effect from April 1 2015 and did not address the issue of whether such companies were liable to MAT for earlier years.

To address the specific concerns of FIIs/FPIs, the government had set up an expert committee to examine the applicability of MAT to such companies. The recently released report of the committee, headed by former Justice AP Shah, categorically states that MAT should not apply to FIIs/FPIs. The key findings in this regard are set out below:

• The legislative history of MAT clearly indicates that it applies only to companies governed by the (Indian) Companies Act, 1956 and not to FPIs/FIIs;

• Although the term 'company' as defined in the Income Tax Act, 1961, includes foreign companies, this definition must be contextually read down for the purposes of MAT so as to cover only those foreign companies which have a place of business in India and which are required under company law to prepare and file accounts;

• FPIs/FIIs merely carry out business in India and they do not have an 'established place of business' as required under the provisions of the Companies Act; and

• If the provisions of MAT are held to be applicable to FPIs/FIIs then such companies would have to compile their global accounts and compute book profits in accordance with the Companies Act. This would be contrary to the principle of 'territorial nexus' which is the basic principle for chargeability of income tax.

On September 24, the government issued two statements dealing with MAT – one dealing with FIIs/FPIs and the other dealing with foreign companies more generally. As regards FIIs /FPIs, the government has said that necessary amendments would be issued to clarify that MAT would not apply to FIIs/FPIs that do not have a place of business in India. Field officials have also been directed to keep proceedings against FIIs/FPIs in abeyance until the necessary legislative changes are in force.

The subsequent statement issued in relation to foreign companies generally states that MAT will not apply to foreign companies (with effect from April 1 2001) if they do not have a permanent establishment or place of business in India. It also states that necessary amendments to this effect will be carried out in the law.

With the above developments, the controversial issue of applicability of MAT to both FIIs/FPIs as well as other foreign companies for the period before April 1 2015 may finally stand resolved.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 2261081000

Website: www.dhruvaadvisors.com