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As markets plunge, Govt gives relief on tax that worried foreign investors

Tax experts have hailed this decision, calling it a bold step considering that it could prune government revenues at a time when the finance ministry is trying to trim the fiscal deficit.

By: ENS Economic Bureau | New Delhi |
Updated: September 2, 2015 8:12:07 am

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Arun Jaitley in Delhi Tuesday. (Source: PTI photo)

The government has decided to waive the retrospective imposition of a minimum alternative tax (MAT) on foreign institutional investors, a move aimed at settling a thorny issue that had shaken investor confidence in recent months.

The clarification by Finance Minister Arun Jaitley came at a hurriedly called press briefing late this evening after the benchmark BSE Sensex tanked by 587 points or 2.2 per cent to touch a 12-month low on concerns over flagging economic growth and sell-off in the global markets.

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Watch Video: A P Shah Panel Recommends No Retrospective MAT On FIIs – What This Means

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In August, FIIs sold shares worth a record Rs 17,000 crore as the domestic bourses faced heavy volatility on concerns over weakness in the Chinese economy.

Jaitley said the government had endorsed the recommendations of a panel set up to examine the issue and said he would make the necessary legislative amendment in the winter session of Parliament.


Accepting the report of the AP Shah committee, Jaitley clarified that MAT would not be levied retrospectively on capital gains of foreign institutional and portfolio investors (FIIs and FPIs) prior to April 1, 2015.

“Today, I have accepted the report of the AP Shah committee. What applies post April 2015, that is no MAT on capital gain on FIIs, will also apply on pre-April 2015,” he told reporters here. In the Union Budget 2015-16, Jaitley had already clarified that FIIs will be exempt from the MAT levy from April 1, 2015. Until the ministry moves to amend the I-T Act, it would, in the interim, convey to field formations through a circular that it has decided to accept the recommendation. “It will be issued tomorrow,” Jaitley said, adding that earlier tax demands would not be pursued further.

Tax experts have hailed this decision, calling it a bold step considering that it could prune government revenues at a time when the finance ministry is trying to trim the fiscal deficit. The decision is also expected to lead to higher foreign investment inflows into the country even as experts have renewed a call for the government to bring in a clarification on the applicability of MAT on all foreign companies other than FIIs and FPIs.


In his briefing, Jaitley asserted that “confidence amongst investors would be a consequence of this move”. “But it will also clarify the ambiguity in law. Contrary to the perception that we were trying to apply a law retrospectively, we weren’t trying to do that.” He also added that the 68-page report is the final draft of the panel and that based on its recommendations, the government would move amendments to Section 115JB of the Income Tax Act, 1961 in the upcoming Parliament session.

According to the report made public today, the Shah panel has recommended that an amendment to Section 115JB of the Income Tax Act, 1961, “clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs or CBDT (Central Board of Direct Taxes) may issue a circular clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs.” An official statement issued after the briefing said that through the amendments to the I-T Act, the government intends to clarify that MAT provisions will not be applicable to FIIs and FPIs not having a place of business or permanent establishment in India, for the period prior to April 1, 2015.

“With this clarification the whole issue of levy of MAT will be resolved in favour of the tax payer. FIIs who had approached the High Court may now consider withdrawing their writ petitions filed earlier. This development will definitely cheer the investor community and will help promote India as a favourable investment destination,” Suresh Swamy, partner, tax and regulatory, PwC India, said.

Traditionally, foreign investors were not subject to MAT on capital gains, an argument that was made by FIIs following the tax notices which were sent to the FIIs demanding tax worth over Rs 602 crore. However the department had cited the Castleton case for sending the notices. In 2010, Mauritius-based investment firm Castleton Investment had approached the Authority for Advance Rulings on the issue. The tax tribunal, in 2012, ruled that even foreign companies are subject to MAT. The case was challenged by the company in the Supreme Court and is scheduled for hearing on September 29.

(with agencies inputs)

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First published on: 02-09-2015 at 04:57:02 am

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