India to exempt foreign financial firms from minimum alternate tax

India’s government will propose tax law amendments that clarify that foreign institutional and portfolio investors (FIIs/FPIs) are not subject to the minimum alternate tax (MAT) on their pre-April 1 income, Finance Minister Arun Jaitley told a news conference on September 1.

The goverment will “bring out an amendment in the next session of Parliament,” Jaitley said.

Foreign financial institutions have put intense pressure on the Indian goverment to halt the assessment of MAT on their sales of Indian listed shares occurring prior to April 1.

The government’s tax demands, began for the first time after the February budget, which pronounced that MAT would not apply to FIIs/FPIs from April 1, but which was silent regarding transactions undertaken before that date.

The tax demands were also consistent with a 2012 case decided by India’s Income Tax Authority for Advance Rulings, Castleton Investment Ltd, now pending before the Supreme Court, as well as other cases.

Jaitley said that the government has now accepted the conclusions of a report prepared by a committee headed by retired judge A.P. Shah which was constituted last May for the purpose of analyzing the issue.

The Shah panel report, publicly released on September 1, concludes that the government should either amend the income tax laws or issue a circular “clarifying the complete inapplicability” the minimum alternative tax to FIIs/FPIs that do not have a permanent establishment (PE) or place of business in India.

The report states that FIIs/FPIs are not governed by the regulatory regime of the Companies Act, and thus the MAT is inapplicable to them. The 2015 amendments exempting FIIs/FPIs from MAT after April 1 were only a clarification, and were not actually required to exempt FFI/FPIs from MAT liability, the panel said.

The report also notes that other countries that levy a minimum tax on foreign companies and persons only do so if there is physical presence in the country.

No view is expressed in the report on whether a FIIs/FPI having a PE or place of business in India are subject to the MAT provisions, though.

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UPDATE: The Indian goverment has issued a press release confirming the government’s intent to propose legislation that provides that “MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015.”

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