- Context: Budget proposed a differential tax rate for the International Financial Services Centre (IFSC), Gujarat
- Govt. proposed a reduced MAT rate of 9% for the IFSC in an SEZ in Gujarat, while retaining 18.5% MAT on all other SEZ developers and units
- News: The Commerce Ministry will raise with its concern finance ministry after taking inputs from SEZ sector
- Reason: The export-oriented SEZ sector is witnessing a slowdown in terms of investment, exports and employment generation since FY12
- Criticism: In the FY12, govt. imposed a 18.5% MAT on SEZ developers and units as well as Dividend Distribution Tax on developers
IT Act will be amended with retrospective effect to exempt foreign firms from MAT
- In a big relief to foreign firms,exempt from minimum alternate tax (MAT) the overseas companies that covered under double taxation avoidance agreements (DTAAs).
- Foreign companies that do not have a permanent establishment in India will be exempt from paying MAT on profits from April 2001.
- Foreign institutional and portfolio investors (FPI) had exempted earlier from MAT on the capital gains made by them before April 1, 2015.
- Government accepting the recommendation of the Justice A.P. Shah Committee on applicability of Minimum Alternative Tax (MAT) to Foreign Portfolio Investors (FPIs).
- Government has decided to make appropriate amendments to the Income-tax Act, which would clarify that MAT provisions would not be applicable to FPIs not having a place of business or permanent establishment in India, for the period prior to April 1, 2015.
- P-Notes are overseas derivative instruments (ODIs) issued by FPIs (earlier Foreign Institutional Investors) to overseas investors, who wish to invest in the domestic stock market without registering themselves with the Securities and Exchange Board of India (SEBI).
- The decision will help in reviving the investor confidence and ensuring clarity of taxation in the hands of the foreign investors.
- MAT was intended to be applied on companies paying no or low tax even though declaring higher profits.It is not applicable to foreign companies not having a place of business or permanent establishment in India.
- As also noted by the A P Shah committee, a change in this settled position in August 2014 is extremely late in the day and is against the intent of the legislation.
- The Finance Act, 2015 attempted to rationalise the position by providing relief from MAT to foreign companies on capital gains, royalties, interest and fees for technical services earned in India with effect from April 1, 2015.
- Govt. has decided to waive the controversial MAT on capital gains made by FIIs prior to April 1, 2015.
- The decision to be carried out through an amendment to Income Tax Act.
- Earlier, Justice A.P. Shah Committee has said that there is no legal basis for levying 20% MAT on past capital gains.
- Finance ministry has already exempted FIIs from MAT from April 1, 2015, through a provision in the 2015-16 budget.
[Correction] – MAT is a form of Direct Tax. Why? Read the explanation after the infograph.
Explained by Vijay –
MAT came into the picture because companies were not paying taxes by the exemptions and deductions under the Income Tax Act.
So they haven’t paid their INCOME TAX during an assessment year.
In order to make them pay their INCOME TAX, IT Act came up with section 115JB which says that the companies should simultaneously compute income tax under normal provisions and under section 115JB and should pay the higher of those two amounts. By this provision, companies cannot evade tax.
Here what companies are paying is an ALTERNATIVE AMOUNT as tax to their ‘zero’ amount of tax. So that is a DIRECT TAX.
This tax is levied on the COMPANY and is paid by the COMPANY. No other organization or person pays MAT on the behalf of the company and even the company cannot shift this burden to any other assessee.
We also have AMT (Alternate Minimum Tax) which is for assessees other than companies. The concept and the rate is same between MAT and AMT but only the applicability is different.
- The Shah Panel is a high-level committee formed in May 2015 to look into the issue of levy of minimum alternate tax (MAT) on foreign institutional investors (FIIs).
- The panel met CBDT chairperson Anita Kapur on Tuesday to discuss the contentious matter.
- The committee is tasked by Finance Minister, Arun Jaitley, to examine all the related legal provisions and pronouncements, and to give its report expeditiously.
- Why? To resolve the controversial levy of MAT on foreign portfolio investors.
- Tax authorities will not issue fresh notices or take coercive action in cases where demands have been raised, pending the panel’s recommendations.
- The Central Board of Direct Taxes (CBDT) would restrain itself from issuing fresh demands of MAT from foreign investors.
- MAT would not be applicable on Real Estate & Infrastructure Investments trusts, unless there is actual transfer of their units.
- MAT is exempted on gains and losses arising on exchange of shares in units of REITs and InVITs.
- REITs and InVITs are aimed at attracting funds into the real estate and infrastructure sectors.
- FIIs contend that MAT cannot be applied to foreign companies as Income Tax Act clause puts place of business in India as a criteria for levying MAT.
- Other arguments stresses that MAT can be levied only on book profits, which are not maintained by foreign investors.
- FIIs have been asked to pay MAT for capital gains made in the Indian stock market in the past 3 years.
- MAT will be applicable on short-term and long-term capital gains and interest income.
- Some estimates take liabilities under MAT to the tune of Rs.40,000 crore.
- FIIs domiciled in countries with tax treaty pacts do not have to pay MAT taxes which includes Singapore and Mauritius.
- In 1987, PM Rajiv Gandhi, in charge of the Finance portfolio, introduced what he called a “Minimum Corporate Tax”. This was to target corporates which made profits & paid dividends to shareholders, but paid very little or, in some cases, zero taxes.
- The law back then allowed several deductions and exemptions which could be utilised to significantly lower or escape tax liability.
- In came P.Chidambaram & Yashwant Sinha respectively along the FM portfolio and FIIs (foreign institutional investors) were exempted from MAT.
- But the IT dept. raised hue and cry when they issued notices to some of the FIIs for past settlements.
- You know how powerful these global investors lobbies are right?
- This move is aimed at rationalizing MAT provisions for FIIs.
- The income earned by foreign firms from securities transactions, shall be exempted from MAT.
- Foreign investors currently hold over 40% of India’s public shareholding in equity markets.
- Currently, foreign investors in India have had to pay 15% on short-term listed equity gains, 5% on gains from bonds, and nothing on long-term gains.