MAT on FII, FPI and Foreign Company in India

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.

Minimum Alternate Tax - Impact of proposals of Finance Bill '12

S. 115JB creates a legal fiction regarding the total income of the assessees which are Companies and the book profit of the Company is deemed to be total income of the assessee in the specified circumstances. It also provides that every assessee, being a company shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Currently various companies engaged in business of banking or insurance are required to prepare their accounts in the form and manner as laid down by the applicable respective banking or insurance laws. Erstwhile S. 115J specifically excluded Electricity Company within its ambit. However no such exclusion has been specially provided u/s 115JB. Hence issue arisen whether provision of minimum alternative tax are applicable to banking and insurance companies. In the series of decisions it was held that the under the applicable banking or electricity Act these companies are required to maintain their accounts in a different form than the one contemplated under section 115JB(2) ie Parts II and III of Schedule VI to the Companies Act, 1956. It was also observed that no obligating was casted on these companies to prepare another profit and loss account as prescribed under section 115JB(2) for the purpose of the Income-tax Act. Accordingly it was finally held that provisions of MAT are not applicable to Banking and Electricity companies. [Ref Kerala State Electricity Board v. DCIT [2011] 196 Taxman 1 (Ker), Union Bank of India v. ACIT [2012] 49 SOT 32 (Mum.), Maharashtra State Electricity Board v. JCIT [2002] 82 ITD 422 (Mum.)]

In order to nullify these decisions clause 46(i) of the Finance Bill proposes to replace sub-section (1) w.e.f. 1-4-2013. It is now provided that –

      a.       Every company, governed by special Acts and not required to prepare accounts as per the provisions of S.211(2) of Companies Act, 1956 shall prepare its profit and loss account as per the provisions of the Act governing such company;

     b.      Every other company for the purposes of S. 115JB, shall prepare its profit and loss account as per the Part II of Schedule VI to the Companies Act, 1956
      and such profit & loss account shall be considered as basis for computing the book profit u/s 115JB.

Proposed amendment would be applicable only with respect to those companies who are company and are exempted from preparation of profit & loss account as per the provisions Schedule VI of Companies Act, 1956. Post amendment, these categories of companies would fall within the ambit of MAT. In case entities not incorporated under Companies Act but are treated as company for the purposes of income-tax may still continue to remain outside the ambit of MAT. This position may also hold good even for foreign company.

Considering the omission of part III in revised the Schedule VI of the Companies Act, 1956 reference to part III has also been omitted in the replaced sub-section (1). However this may create certain anomaly for the companies during AY 2012-13, since revised Schedule VI is applicable to the companies having financial year beginning on or after 1-4-2011, whereas replaced provisions referring revised Schedule VI is applicable from previous year 2012-13. [Considering representation appropriate amendments has been made on this point at the time of passing Finance Bill '12 in the parliament]

(extracts from the article on Finance Bill 2012 published in Income Tax Review April 2012 Issue)