Latest gift for foreign investors: MAT on capital gains scrapped

The Narendra Modi government, which has launched an all-out campaign to good-humour foreign investors even if it is at the cost of India’s national interest, on Tuesday accepted the recommendation of the <g data-gr-id="19">A P</g> Shah Committee that the minimum alternate tax (MAT) should not be imposed on overseas portfolio investors retrospectively. 

Finance Minister Arun Jaitley said that the panel, headed by Law Commission of India Chairman A P Shah, submitted its final report on the issue of applicability of MAT on capital gains made by foreign institutional investors (FIIs) prior to April 1, 2015, on August 25. The Government has accepted the report, he told reporters at a late evening press conference here. Jaitley said that an amendment to the Income Tax Act to reflect the same would be made possibly in the winter session of Parliament in November/December. 

While the issue had riled foreign portfolio investors, Jaitley had in his Budget for 2015-16 exempted FIIs from the levy from April 1. “What applies post-April 2015, that is no MAT on capital gain on FIIs, will also apply on pre-April 2015,” Jaitley said.

Foreign investors have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds. MAT has been levied on all companies except those in the infrastructure and power sectors since <g data-gr-id="34">late 1980s</g>. Historically, foreign investors have not paid this tax because it was believed that only Indian companies were subject to it. 

In 2010 Mauritius-based investment firm Castleton Investment approached the Authority for Advance Rulings (AAR) to get confirmation that it was not required to pay MAT on a transaction it wanted to execute. However, AAR in 2012 ruled that even foreign companies are subject to MAT. FIIs had argued that MAT is applicable only to domestic companies that had their base in India. By virtue of not being established in India, they should be “exempted”. 

FIIs also contend that there was <g data-gr-id="30">inconsistency</g> in the application of MAT as ever since it was introduced, FIIs were always exempted from it and hence, <g data-gr-id="31">arbitrary</g> application should be avoided.