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Industry body Assocham has urged the Government to clarify that MAT will not be levied on foreign companies that do not have any branch or a permanent establishment in India.
Such a clarification is needed for incomes sourced out of India by such foreign companies, the chamber said in a letter to Finance Minister Arun Jaitley.
This is required in the wake of recent rulings of Authority for Advance Rulings which held that provisions of minimum alternate tax (MAT) would be applicable even to foreign companies that do not have any branch or a permanent establishment in India, as regards income sourced here.
This issue has been further aggravated by the interpretation of AAR that provisions of MAT would override even the beneficial provisions of tax treaty, the letter said.
Applying MAT provisions to foreign companies would result in an “absurd situation” where foreign companies having interest income, fee for technical services etc will have to pay MAT at an effective tax rate of around 20 percent.
This would be the case despite such incomes being subject to tax at reduced rates under the income tax law or under the double taxation avoidance agreement.
Overriding the beneficial provisions of treaty could mean that foreign companies cannot avail capital gains tax exemption available under tax treaties with countries such as Mauritius and Singapore, the Assocham letter said.
WHAT IS MAT?
The concept of MAT was introduced in income tax law to ensure that no taxpayer with substantial income can avoid tax liability by using exemptions, deductions and incentives.
MAT brought to tax companies that made high profits and declared dividends to shareholders but had no significant taxable income due to incentives, exemptions and deductions.
Under the income tax law, if a company’s taxable income is less than a certain percentage of the book profits, then by default that much of the book profits will be considered as taxable income and tax has to be paid on that.
Currently, the basis of levy of MAT is on ‘book profits’.
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