100 FIIs owe IT dept whopping $10 bn

The Income Tax Department has slapped a tax demand on nearly 100 foreign funds, which have been asked to cough up an estimated $5-6 billion for ‘untaxed gains’ made by them in the Indian markets over the past years. 

Till March 31, close to 100 FIIs got notices from the Income Tax Department for paying the Minimum Alternate Tax (MAT) of 20 per cent. These notices are now being followed up with Assessment Orders.

The FIIs have, however, decided to challenge the tax demands, stating that MAT cannot be levied on FIIs or FPIs as they do not earn any ‘business income’ in India and their income is defined as ‘capital gains’ under the I-T Act.  These FIIs, many of whom have now converted themselves into Foreign Portfolio Investors (FPIs), include entities from the US and Europe as also those operating through Singapore, Hong Kong and Mauritius.

The number of affected investors can rise substantially as assessments are still in progress and notices could be served in many more cases, taking the overall tax demand from them to well over $10 billion, sources said. The affected funds have raised the issue with Finance Minister Arun Jaitley, capital markets regulator Sebi, the Central Board of Direct Taxes and the top Finance Ministry officials, while they are now planning to approach Prime Minister Narendra Modi to intervene in the matter.

When contacted, a top official said that the government is looking into the matter to allay any ‘genuine concern’ such investors might have, but added that no assurance can be given as of now to nullify the notices. Though Finance Minister Arun Jaitley in the Budget announced that the relevant sections so as to specifically “provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to an FII, shall be excluded from the chargeability of MAT...,” these these amendments, said an official, will take effect from April, 1, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.” Indian tax laws allow such notices and assessments to be issued for up to seven previous years.

There are an estimated 8,000 FPIs registered in the country and they have emerged as a mainstay of the Indian markets over the years with an overall outstanding net investment of $226 billion (over Rs 11 lakh crore).

This includes over Rs 8 lakh crore in stocks and Rs 3 lakh crore in debt markets. In the fiscal 2014-15 itself, FPIs made a net investment of Rs 2.7 lakh crore into the Indian markets. This is the first time since 1993, when FIIs were allowed to invest in the Indian markets that such investors have been asked to pay MAT.