After Vodafone,
another point tax officers have gone overboard is levy of Minimum Alternative
Tax (MAT) on Foreign Companies / Foreign Portfolio Investors (FPI) / Foreign
Institutional Investors (FII). Issue arisen due to revenue favourable ruling of
Authority of Advance Ruling (AAR) in case of Castleton Investment wherein AAR
has suggested levy of MAT on foreign Company. However in another three rulings -
Timken, Fidelity and Royal Bank of Canada, AAR has ruled against revenue and in
favour of tax payer. As per the provisions of Income-tax Act ruling of AAR is
binding on the person who has sought it and not on any other person. Further
Hon'ble Apex Court in way back in 1973 in case of Vegetable Products Ltd.
has held that when two reasonable constructions of a taxing provision are
possible, the construction which favours the assessee must be adopted. Hence
the view taken by the tax authorities merely on the basis of the AAR ruling
favouring Revenue is extremely aggressive. Considering the intention of
provisions and language of the Section 115JB, levy of MAT on FPI, FII and
foreign Companies seems incorrect interpretation. However one need to consider
the amendment to the Section 115JB(2) made by Finance Act 2012.
Finance Minister
has brought amendment in the Income-tax Act that not MAT on FPI w.e.f. April 1,
2015. While moving the amendment he pointed that in order to rationalise the
MAT provisions for FIIs, profits corresponding to their income from capital
gains on transactions in securities which are liable to tax at a lower rate,
shall not be subject to MAT. However he refrained from granting benefits for
the past year. Post proposing this amendment, Stock Market reacted negatively. This
led to series of clarifications by the Finance Minister as well as Minster of
State for Finance. They have clarified that in case foreign investors are
coming through treaty nations, they can avail of benefits from under tax
treaties and it may not be subjected to MAT. Further in order to provide stable
tax regime Government also set up A P Shah Panel.
During last week
of July 2015 committee has delivered report to the Government. Government is
yet to make the report public. From the press reports it is understood that the
A P Shah Committee has recommended granting relief to such investors on MAT
levy prior to April 1, 2015 and the government is favourably considering the
committee’s recommendation. During the hearing in respect of Special Leave
Petition filed by Castleton Investment in Supreme Court, Revenue sought time
till September 29, 2015 to reply.
It is pertinent
to note that majority of the MAT dispute cases are related to foreign companies
and with respect to FPI. From the press report it is also understood that the
revenue department did a faux pas by excluding foreign companies from the terms
of references for the A P Shah panel. In case Government only exempt FPI or FII
from MAT for prior years too, issue would not be put to rest for levy MAT on foreign
companies. However, stock market which has tumbled to today may have good news
for rejoice in case Government resolving MAT favourably for FII / FPI.
