Indian Finance Minister Arun Jaitley on April 26 said that his administration has no choice but to impose minimum alternative tax (MAT) on capital gains of foreign institutional investors, calling it a legacy from the past, and said he was considering constituting a high-level committee to look into ways to provide more tax certainty to investors.
Moreover, the Indian government on Friday issued a notice stating that the income tax department will, within one month of filing, settle any foreign institutional investor claim for a tax exemption under a treaty.
The developments are the government’s latest attempts to contain the fallout from its decision to begin issuing tax notices to foreign investors demanding payment of MAT on sales of Indian listed shares.
The demands, issued for the first time a few weeks ago, followed the government’s February budget, which pronounced that MAT would not apply to foreign institutional investors from April 1, but was silent regarding transactions undertaken before that date. The 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.
In an opinion piece published in The Financial Times, Jaitley explained that the tax rulings forced the goverment to levy MAT on transactions occurring before April 1.
“We have had little choice but to respect these decisions. The rule of law cuts both ways. We cannot say it is undermined when we take retroactive actions, and at the same time seek to override, retroactively, the decisions of our institutions. However, we have made clear that these rulings can be contested in higher courts, which will respect due process and have the power to quash faulty decisions,” he said.
Jaitley also confirmed that foreign firms investing through countries with which India has a tax treaty can claim a tax exemption from MAT. International tax treaties cannot be overridden by rulings, he said.
He further said the government is considering setting up a high-level committee to explore “what can be done to resolve the past, and move beyond it,” to improve predictability for investors.
“Our tax administration cannot afford to lag behind,” he said.
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