Greater clarity on minimum alternate tax for FPIs likely

According to sources, the income tax department’s move could have an adverse bearing on portfolio investments unless some clarification is issued by the finance minister.

New Delhi | Published:February 12, 2015 1:41 am

By: ENS ECONOMIC BUREAU & PRESS TRUST OF INDIA 

Finance minister Arun Jaitley is likely to clear the air about applicability of minimum alternate tax on foreign portfolio investors (FPIs) in the Budget to be unveiled on February 28.

The issue of levying minimum alternate tax on FPIs cropped up with the income tax department issuing notices to certain FPIs asking them why they should not be subjected to the tax.

In the notice, the tax department had asked FPIs to submit their profit and loss statements and balance sheets, something that is required to be done by companies and, in the usual course, not by FPIs.

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By asking the FPIs to furnish profit and loss statements, the tax department is looking at calculating the minimum alternate tax it can charge from the FPIs structured as corporate entities.

According to sources, the income tax department’s move could have an adverse bearing on portfolio investments unless some clarification is issued by the finance minister.

Minimum alternate tax is levied on all profit-making companies at the rate of 20 per cent. It was introduced by the government in 1980s to bring into net companies which were not paying any taxes after claiming exemptions under various provisions of the tax laws.

“Income Tax department has sent letters to a number of FPIs asking them to explain why they should not be liable to MAT,” a source said. According to experts, there is no clarity about applicability of minimum alternate tax on FPIs and it is felt that imposition of the levy could have a bearing on foreign portfolio fundings in the Indian stock market.

“The Budget should clarify the government’s position on applicability of MAT to FPIs, else it may result into another long drawn dispute and litigation,” said Vikas Vasal, Partner, Tax, KPMG (India).

Vasal further said that there is a strong view that the foreign companies are not liable to maintain books of accounts in India and hence minimum alternate tax is not applicable to them, therefore, FPIs are not liable to pay MAT.

FPIs encompass all foreign institutional investors (FIIs), their sub-accounts and Qualified Foreign Investors (QFI) under a new regime that came into force on June 1, 2014.

Overseas investors have pumped in more than Rs 45,000 crore ($7.35 billion) so far in 2015, according to the latest data available with the capital markets regulator.

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