What is MAT?
MAT was first introduced in 1988-89 to ensure that all
companies pay a fixed percentage of their book profits as tax. Book profits are
the profits made but not realised through a transaction. For calculating MAT,
they are computed through a specific process.
MAT was withdrawn by the Finance Act, 1990 and then
reintroduced by Finance (No. 2) Act, 1996, with effect from 1 April, 1997.
As per the provisions of section 115JB of the Income-Tax
(I-T) Act, if the income tax payable by any company on its “taxable income”
under the normal provisions of the act is less than 18.5% of its book profits,
then the company needs to pay MAT at 18.5% (plus applicable surcharge and
education cess).
This tax is to be paid even if the companies’ tax
liability, as per income tax laws, is lower than the mandated tax rate of
18.5%, owing to tax incentives and deductions availed by the company. MAT
provisions were intended to tax zero-tax companies and companies paying
marginal tax.
What is the current dispute between the government and
FPIs?
The I-T department issued notices to foreign investors
for levy of MAT on capital gains accruing to them from sale of shares, citing
an August 2012 order by the Authority for Advance Rulings in the case of
Castleton Investment Ltd that MAT is applicable on both domestic and foreign
companies. So far, the department has sent notices to 68 FPIs demanding a
total Rs.608 crore as MAT.
The FPIs contend that MAT provisions should not apply to
them since they do not have any place of business in India and so are not
required to maintain account books in India.
It has also been indicated at the time of enactment of
and amendments to the MAT provisions that MAT is a levy of tax on domestic
companies to neutralise the effect of tax incentives. A foreign company,
especially an FPI, is unlikely to claim any of the specified incentives under
the domestic tax law.
What has the government proposed?
In his Budget speech, Jaitley had exempted capital gains
accruing to FPIs from levy of MAT. But these provisions would only be
applicable from 1 April, 2015. “Exclusion of capital gain introduced in the
Finance Bill, 2015 for FPIs would not have retroactive application to years
prior to 1 April 2015 and accordingly, MAT provisions shall apply to income and
capital gains earned by FPIs for years prior to 1 April 2015,” says Rakesh
Nangia, managing partner, Nangia and Co., a Delhi-based chartered accountant
firm.
Earlier this month, Jaitley also moved amendments to the
Finance Bill 2015 to exempt foreign investors’ capital gains from the sale of
securities, interest income, royalty and fees for technical services from MAT,
in cases where the tax rate was less than 18.5%, a move which is expected to
benefit private equity, venture capital investors and debt funds. But the
minister refrained from giving any blanket relief from liability arising in
previous years. In other words, the dispute on retrospective levy of MAT
remains, which is to be decided by the Supreme Court .
The challenge for FPIs
For foreign companies that do not have any permanent
establishment in India, the effect of MAT can be high as these companies may
not be able to claim credit of MAT in their home country.
“The tax authorities have asked FPIs to pay MAT
retrospectively. Since most of the FPIs have already distributed the funds back
to the investors, it will be practically impossible for them to recover the
funds in order to discharge MAT liability,” said Manoj Purohit, partner, Walker
Chandiok and Co. LLP, a professional services firm.
“Paying MAT would negatively impact FPIs as most of their
income is either exempt from tax under the Act or tax treaty or taxed at
concessional rates of 15% in case of short-term capital gains. Considering that
their intention is only limited to investing in India and the Act already
extends various beneficial tax treatments to FPIs, the backdoor taxation of
such FPIs by way of MAT is unfair and unjust,” says Nangia.
