FM exempts part of foreign investors’ income from MAT

Seeking to calm investor jitters, Finance Minister Arun Jaitley on Thursday offered tax relief to FIIs by exempting some of their income from MAT and announced that an “extremely simplified” income tax return form will soon replace the controversial 14-page ITR that sought details of all bank accounts and foreign trips. Replying to the debate on the Finance Bill, 2015, in Lok Sabha, he said Prime Minister’s social security schemes will be exempt from service tax and also tinkered with indirect tax rates on raw silk, iron ore and rubber. With funds fleeing India as the row over 20 per cent minimum alternate tax (MAT) on capital gains they made in past three years escalated, Jaitley offered relief by exempting income foreign firms earned from securities transactions and interest, royalties and fees for technical service from MAT.

The exemption would apply only in those cases where the normal tax rate is below 18.5 per cent. He, however, offered no relief retrospectively as has been demanded by foreign portfolio investors. The rules for the application of MAT for real estate investment trusts were also eased. Later, the Finance Bill was passed by voice vote, bringing to close the three-stage budget process in the House. On the indirect tax side, export tax on low-grade iron ore was cut to 10 per cent from 30 per cent, in a bid to boost shipments of the steelmaking raw material from Goa. The new duty structure will be applicable from June 1, Jaitley said. Referring to the controversial new ITR form, he said an “extremely simplified” income tax return form will soon be brought. “I am having the entire matter reviewed and very soon you will hear an extremely simplified procedure coming for us,” he said. 

“Recently, a controversy did come up. There is an old income tax form of 12 pages which was made thirteen-and-half pages. I was out of the country when this was done, I had it stopped.” Buying peace with RBI, Jaitley dropped plans for the time being to strip the central bank of powers to regulate government bonds and give it to an independent agency.  

Meanwhile, five foreign portfolio investors (FPIs) from the US and the UK on Thursday moved the Bombay High Court challenging the Income Tax department’s demand for Minimum Alternate Tax (MAT) on the profit earned from trading in stocks and bonds. The petition, filed by National Westminster Bank Plc, First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund, First State Global Emerging Market Sustainability and BNP Paribas L1, is expected to come up for hearing on May 6. These investors, who are not covered under the double taxation avoidance agreements (DTAAs), received notices from the IT department earlier this month asking them to pay MAT.

So far, the tax department has sent demand notices to 68 non-DTAA FPIs, seeking altogether Rs 602.83 crore. As there are close to 3,000 FPIs, most of them not covered by DTAAs, the IT department is expecting to collect around Rs 40,000 crore. Around 40 per cent of the FPIs in the country come through Singapore and Mauritius with which India has DTAAs. These are, therefore, not liable to pay MAT on the capital gains but their holding in the domestic stock market is only around 30 per cent of the total Rs 22 trillion.

As the MAT issue tripped the market -- Sensex shed more than 900 points in April alone -- the government has reached out to FPIs. In an editorial in The Financial Times, Finance Minister Arun Jaitley earlier this week suggested formation of a panel to look at legacy issues to resolve the problem within a month. Following this, the 

Central Board of Direct Taxes said in a statement on April 27 that it would resolve all MAT-related matters of FPIs under DTAA ambit within a month of filing of claims.

During the debate on the Budget, Jaitley told Parliament that the government would 

provide some relief to foreign investors from MAT by exempting them from capital gains made effective this fiscal but declined to relent on the past liabilities.