As the minimum alternative tax (MAT) controversy boils over, the Finance Ministry on Wednesday went on interactive mode with several foreign portfolio investors (FPIs), seeking to defuse the tax row that could affect their perception about India. Led by Jayant Sinha, Minister of State for Finance, top brass of the Finance Ministry held a conference call with these investors to ease their concerns on the MAT issue.

Avoidance pact Bringing some comfort to FPIs, Revenue Secretary Shaktikanta Das clarified that MAT will not be applied to investors coming through double taxation avoidance agreement jurisdiction, as only the terms of the treaty will apply.

FPIs were told that treaty benefit will prevail, sources said.

The income tax department’s move to claim MAT for prior years had clearly miffed several FPIs, who cried foul over the uncertainty surrounding the retroactive taxation of returns in their fund.

Litigation process Many FIIs/FPIs contend that it would now be difficult to go back and rework the net asset values of their offshore funds so as to factor in the new tax bill related to past years. Meanwhile, for the past period problem, Sinha and his officials said the best course of action for investors is to join the Supreme Court litigation, as the government needs a judicial pronouncement in order to address the past period issue.

A foreign company (Castleton Investments) was aggrieved by the Authority for Advance Ruling (AAR) pronouncement that MAT will apply for foreign companies and had moved the Supreme Court in appeal.

Meanwhile, on Wednesday, FPIs were told that the MAT applicability issue was a consequence of the AAR pronouncement (in a certain case).

Prospective applicability This issue was examined by the government and hence the move in recent Budget to prospectively exempt their gains from MAT applicability. The government is not able to make a policy intervention for the past cases, the Finance Ministry top brass said.

Sameer Gupta, tax leader for financial services, EY, said, “We are hearing that the government has clarified that for FPIs coming from treaty countries, such as Singapore, Mauritius, etc, the benefits under the treaty should be available — both for the past years and prospectively. This is indeed a positive announcement. While reassessment proceedings have been initiated, it would mean that if these announcements are given effect to, MAT should not apply to treaty protected cases.”

Rajesh H Gandhi, Partner, Deloitte, Haskins & Sells LLP, said the clarification that Mauritius and other treaty based FIIs will not be subjected to MAT is along expected lines. “This clarification will therefore help to reduce the needless litigation for treaty based FIIs. More than 30 percent FII investment comes through treaty countries and therefore this will definitely be a big relief for such cases,” Gandhi added

Global advisory firm CLSA, which had a Q & A with taxation experts from Deloitte, said the stage is set for a long legal battle ahead.

Clearly, India is not completely out of the ‘tax claims pertaining to prior years’ syndrome yet. If courts finally uphold the claims of the income tax authorities, it will create operational chaos for FIIs as they will need to determine who will foot the tax bill.

”In the worst case, assuming half the FII funds (by value) are impacted by this case and going by the government’s estimated tax collection of ₹40,000 crore, a 4 per cent impact could be felt on the NAVs of these funds, if funds foot the tax bill.

The stock market hasn’t yet reacted to these developments as only a few funds have received notices so far and the general expectation is that the issue will not escalate nor the legal battle can go on for years, CLSA added.

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