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Tax & Regulatory

A welcome retro tax move for a change

The government on Thursday decided to give relief to foreign companies with no ‘place of doing business’ in India from the 18.5% minimum alternate tax demands issued to them, saying that amendments to the tax law to this effect would be brought in very soon. The relief will be available to companies irrespective of whether they are from a country with a tax treaty with India or not.

The move could benefit companies such as the US-based Timken facing MAT demands. The Mauritius-based Castleton Investments, which is fighting a tax notice in the Supreme Court, would anyway have escaped MAT liability as the government had recently clarified that entities from treaty partner nations would get the treaty benefits. Castleton’s trading income from India would only be subject to capital gains tax in Mauritius, where it is zero rated.

The latest clarification puts the MAT controversy to rest finally as all sorts of foreign investors without business presence in India — foreign portfolio investors and companies — are now exempt from MAT, irrespective of a tax treaty. Those having a permanent establishment (PE) or place of business in India are anyway required to prepare their books of accounts and present it to shareholders at an annual general meeting under the Companies Act and hence could attract MAT provisions if their tax liability calculated as per normal income tax provisions falls below 18.5% of their book profits computed as per Companies Act on account of excessive use of tax exemptions, explained finance ministry sources.

While many foreign companies operate in India without PEs, there are others that have India-incorporated wholly owned subsidiaries or joint ventures(which are Indian companies) and/or PEs here but still prefer do some of their businesses in the country without a PE for the same. Some of the bilateral tax treaties, like the India-UK one, have a clause that makes it virtually impossible to use the route without PE for doing businesses similar to those done via a PE.

Now that all foreign investors have got full relief from MAT, the direct taxes that they are liable to pay in India would only be the withholding taxes on “fee for technical services, royalty and interest income”, a senior official clarified.
Sameer Gupta, leader for tax financial services, EY India, said: “Thursday’s announcements address the complete set of investors, for instance, those coming in under FDI (foreign direct investment) route, FVCI (foreign venture capital investor) route, etc. What now is to be seen is if these amendments are taken up and pushed through the winter session of Parliament.”

Justice AP Shah, who reviewed the MAT applicability on FPIs, had argued that since FPIs not having a place of business or PE in India do not prepare books of accounts in India as per the Companies Act, MAT liability cannot be attributed to them. The government, which announced MAT relief to FPIs on August 1 based on Shah’s recommendation, accepted the same logic to be true for foreign companies without a PE in India too.

The Modi government had earlier decided not to pursue tax demands relating to share valuations where courts and tribunals had favoured taxpayers and had already resolved about 35 large cross-border tax disputes with multinational corporation bilaterally with the tax authorities of their home countries. Finance minister Arun Jaitley is also expected to refer other litigious tax issues to the Shah panel shortly. Jaitley recently said that the government was working on solutions for the tax disputes it inherited.

Girish Vanvari, national head of tax, KPMG, said the decision to amend the Income Tax Act on non-applicability of MAT was a welcome step as it would remove ambiguity and encourage foreign investments into the country. “What is more heartening is the speed with which the government has acted,” said Vanvari.

Manoj Purohit, partner, Walker Chandiok & Co, said that with this amendment, one can look forward to speedy solutions to other pending tax disputes as the government’s intention was evident that it wants to end the tax uncertainty.

The relief granted to FPIs and foreign companies are for the period prior to April 1, 2015. For the subsequent period, they are anyway not liable to pay MAT as per an amendment introduced in the law through this year’s Budget.
Investors had raised a hue and cry and approached courts when the tax department recently issued notices to FPIs in about 68 cases with a total tax demand of Rs 602.8 crore for the period prior to April 1, 2015.

The article appeared in the Financial Express. The article can be found here.