Meaning MAT

What is Minimum Alternate Tax, the MASSIVE demand that the I-T department has slapped on FIIs and FPIs?

Written by Shaji Vikraman | Published: April 27, 2015 2:31 am

Meaning MAT: What is Minimum Alternate Tax, the MASSIVE demand that the I-T department has slapped on  FIIs and FPIs?

In 1987, Prime Minister Rajiv Gandhi,  in charge of the Finance portfolio, introduced what he called a “Minimum Corporate Tax” to target corporates including Reliance, which was then an undivided group that made profits and paid dividends to shareholders, but paid very little or, in some cases, zero taxes. Many companies could so because the law then allowed several deductions and exemptions which could be utilised to significantly lower or escape tax liability. Rajiv Gandhi in his budget sought to ensure that a local, widely held company had to pay a tax of at least 15% of its book profit.

A decade later, P Chidambaram, in Budget 1996, came up with the ‘Minimum Alternate Tax’ — keeping out just the power and infrastructure sectors, and refined it in his ‘dream budget’ the next year, to exempt export profits, besides introducing a new carry forward system. It was extended to developers and units in SEZs by the UPA government. In this year’s budget, the government made it clear that from April 1, 2015 , foreign institutional investors who buy billions worth of stock of Indian companies and their debt instruments would be exempt from MAT on the income from capital gains. But a row broke out after India’s taxmen issued a spate of notices to some of these investors, telling them to pay MAT on past investments in the country.

MAT is charged at 18.5% and, after taking into account surcharges, works out to a little over 20%. Many of these investors do not pay tax on capital gains, as tax treaties signed by India with some countries — notably Mauritius and Singapore — provide for an exemption from tax on gains from investing in stocks.

Global investors are a powerful group and can inflict significant collateral damage fighting back. In 2000-01, NDA 1 Minister Yashwant Sinha had to clarify on tax treaty benefits to investors from Mauritius , with which India has a pact.

So , what next? A repeat of history. On Friday, I-T blinked and clarified that it would swiftly settle claims for an exemption on MAT from foreign funds coming from destinations like Mauritius, Singapore and countries with which India has double taxation avoidance treaties.

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