India abstained from MAT for 19 years: Shah panel

 India has never levied the minimum alternate tax (MAT) on foreign investors, ever since it was introduced 19 years ago in 1996.

Instead, the investors was governed by a beneficial tax scheme under the Income Tax Act, says a fine print of the A P Shah Committee report.

It adds that no other BRICS nation (Brazil, Russia, China and South Africa) levy MAT. Some of the OECD countries, such as Austria, Belgium, Hungary, Republic of Korea, Luxembourg, and the US levy MAT, but they do not levy the same on foreign companies or persons unless they have a physical presence in such countries. “India is, therefore, perceived as an exception in terms of its tax treatment of FIIs/FPIs,” said Shah in the report, recommending that the tax department issue a circular clarifying complete inapplicability of MAT on FIIs and foreign portfolio investors.

The MAT demand began in April this year, when the Income Tax Department sent notices to a few FIIs MAT on their book profits prior to April 1, 2015. The demand notices were sent after Jaitley in his budget for 2015-16 announced that MAT will not be applicable on these investors after April 1, 2016. MAT is a tax levied on companies which have physical presence in India, show profits on their books and declare dividends, but pay minimal or no tax. FIIs or FPIs are foreign entities who invest directly in Indian equity and debt securities from overseas after meeting the securities. They normally do not have their own office or employees in India and carry out their decision-making activities outside India. All their dealings are through independent agents in India.

Additionally, Sebi Regulations do not mandate maintenance of books of accounts by them. Thus, FIIs and FPIs are not covered under the Companies Act.

The Shah Committee also recommended an amendment in the Income Tax Act of 1961, clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs. The government has accepted the suggestion.