Govt accepoints Shah panel recommendation not to levy MAT on FIIs

The government has accepted the recommendation of the Justice AP Shah Committee on the inapplicability of minimum alternate tax (MAT) on capital gains of foreign institutional investors and foreign portfolio investors (FIIs/FPIs) in a big boost to foreign funds investing in Indian equity markets.

The move, which will boost overall investor confidence and help sentiment in the financial markets, is expected to help steady Indian stock market hit by the meltdown in Chinese and other major markets.

"Through the amendment the government proposes to clarify that MAT provisions will not be applicable to FIIs / FPIs not having a place of business / permanent establishment in India, for the period prior to April 1, 2015," finance minister Arun Jaitley said.

The committee has recommended that section 115JB of the Income-tax Act may be amended to clarify the inapplicability of MAT provisions to FIIs / FPIs.

Alternatively, the committee has suggested that a circular may be issued clarifying the inapplicability of MAT provisions to FIIs/FPIs, for the time being.

The government will now suitably amend the Income-tax Act. Pending such amendment, CBDT will convey to the field formations the decision of the government to accept the recommendation.

The committee on direct tax matters chaired by Justice AP Shah was constituted with the initial mandate to examine the matter relating to levy of MAT on FIIs / FPIs for the period prior to 1 April 2015. The committee submitted its final report to the government on 25 August 2015.

The decision to levy MAT has spooked foreign investors who launched a barrage of criticism over what they call the government's fresh round of "tax terrorism," forcing the government to put on hold fresh notices to FIIs on MAT.

The government, however, maintained that the decision to levy MAT on foreign portfolio investors was taken not by the NDA government but by quasi-judicial bodies like the CBDT.

The I-T department had, since October-November 2014, sent notices to about 70 FIIs to pay minimum alternate tax (MAT) for previous assessment years totalling Rs603 crore. The notices were based on a ruling by a tax appellate authority in a 2012 case that involved transfer of shares by Castleton, a Mauritius-based FII, to a Singapore-based entity.

Sources say that if the tax authorities opt to open all such cases going back up to seven years, the total tax obligation on FIIs would have been around Rs30,000-40,000 crore. Left untaxed, these FIIs could create much more wealth than the estimated Rs40,000 crore tax gains to the exchequer.