FIIs under tax treaty to be exempted from MAT claim

25 April 2015

Foreign Institutional Investors (FIIs) are reported to have been assured by the government that it would go by bilateral tax treaties and those covered by such treaties would be able to avail of treaty benefits wherever possible in accordance to the Minimum Alternate Tax (MAT) cases.

In a notification, the Central Board of Direct Taxes (CBDT) asked tax officials to resolve the issues pertaining to the tax claims involving FIIs. The board has also asked tax officials to expedite ruling on whether an investor can qualify for the tax treaty benefit and hence will be exempt from MAT claims.

''It has come to the notice of the Board that several FIIs receiving income from transactions in securities claim such income as exempt from tax by availing benefit provided in the Double Taxation Avoidance Agreements (DTAAs) signed between India and their respective countries of residence,'' CBDT said in its notification.

''Since the issue involved in such cases is limited, such claims should be decided expeditiously and the decision may be taken on such claims within one month from the date such claim is filed,'' it added.

While this move could be positive for FIIs that come under countries with which India has signed tax benefiting treaties, it may not be positive for the FIIs belonging to the countries that are not in tax treaties with India.

The CBDT circular comes two days after the government has reached out to 1,000 FIIs across US, Singapore, Hong Kong and Mauritius, giving them assurance on claims that can be made over the treaty benefits, says the report.

The government has pushed for a Rs40,000 crore tax demand on FIIs after they have lost a case before the tribunal against the levy of 20 per cent Minimum Alternate Tax (MAT) on capital gains. (See: Foreign funds told to pay up $6 billion in MAT dues)

Foreign portfolio investors in Indian capital markets have been told to pay up $5-6 billion in unpaid taxes on their ''untaxed gains'' over the past years. These funds have not paid the minimum alternate tax (MAT) on their long term gains.

Foreign funds investing in secondary markets in India have so far paid 15 per cent on their short-term gains on investments in listed equity and 5 per cent on gains from bonds, but have not paid anything on their long-term gains.

The tax authorities have been sending notices to these funds since late last year, asking them to pay MAT of around 5 per cent.

A five per cent MAT added to 15 per cent tax on the short-term gains potentially brings overall tax on market gains of these funds to 20 per cent.