NEW DELHI: After months of wobbling, the government has finally decided to go easy on taxing foreign investors. The Finance Ministry on Tuesday accepted the Justice A P Shah panel’s recommendations on the controversial Minimum Alternate Tax (MAT), which suggested that Foreign Portfolio Investors (FPIs) need not pay MAT prior to April last.
The move is likely to have multiple benefits. It will restore India’s ‘investor-friendly’ image that took a beating due to slow pace of reforms, improve ease of doing business ranking from the current 142, prevent flight of foreign capital — FPIs pulled out $2.65 billion in August — and importantly, amicably resolve high-profile cross-border tax disputes, including Vodafone’s $2.5 billion tax slap, Nokia’s $340 million and Cairn Energy’s $1.6 billion tax demand. It will give also relief to over 100 FPIs that were slapped notices to collect MAT retrospectively.
While existing tax disputes will be disposed of, this will, however, take time. The government first has to amend the Finance Act, 2015, to change the Income Tax Act and ensure MAT is not applicable on transactions prior to April.
According to Finance Minister Arun Jaitley, the Shah panel’s 68-page report was the final draft of the panel and the government will move an amendment to the I-T Act in the winter session of Parliament.
Till such time, the Income Tax Department will issue a circular to field formations for holding back action on notices issued for levy of MAT. Those who have deposited the money will get a refund under existing tax regulations.
During Budget 2015, Jaitley said there will be no MAT from assessment year 2016-17, though tax officials issued notices. With 95 per cent of the FPIs that received MAT demand notices knocking the doors of the dispute resolution panel or high courts, the government, to mollify investors, formed a panel headed by Justice Shah and former chief economic advisor Ashok Lahiri and chartered accountant Girish Ahuja as members.
Originally, MAT was introduced to curb ‘zero tax’ companies, who despite showing profits in the balance sheet computed under the Companies Act, avoid taxes citing incentives and deductions.
This was the first time since 1993, when FIIs were allowed to invest in the market, that they have been asked to pay MAT.