MAT-Minimum
Alternate Tax was introduced back in 1998. The Finance act 2000, inserted
section 115 JB of Income tax Act, 1961 providing for levy of 20 % tax if the
regular tax payable falls below 20 % of book profits. The intention of government
was clear to tax so called zero tax companies which had significant book
profits, paid dividends but paid little or no tax because of various tax
holidays and deductions. FIIs began investing in India in 1993. Technically
applies to all companies. It was widely believed that MAT only applied to
domestic companies as the stance on the issue in the formal law was ambiguous.
In fact the Authority for Advance Ruling, a tax body to determine issues on
foreign tax liability concluded in 2010 that MAT did not apply to companies
without a permanent establishment in India. This changed in 2012 when the same
body contradicted its prior ruling stating for the first time in Castleton case
that foreign investors were required to make MAT payments. The issue laid
dormant as the company against whom ruling was passed sought an appeal.
Our
honorable Prime Minister began his tenure at the helm of one of the world's
fastest growing economies with special focus on foreign investment. Everything
seemed to be in place. The new and jubilant era had commenced apparently. Moody
changed its outlook on India from stable to positive. India was hailed as
'bright spot' in Asia by none other than IMF chief Christian Laggarde. Bushels
of foreign investment over flowing in.The the World Bank pegged India's
estimated growth at 7.5 percent. To cut a long story short, party was on for
India until the MAT issue caught fire. The issue got rekindled when finance
minister exempted FII income from MAT after apple 1 2015 on the budget day. But
what about the FII income before April 1, 2015?
The tax
department issued demand notices to the tune of Rupees 6500- 7000 crores for
payment of MAT on capital gains much lower than $ 6-7 billion as claimed by
overseas investors to pressurize government. During January to April
investments by FPIs totaled Rupees 94,241 crores but the bad news is that
investors have pulled out nearly Rs. 17,000 crore from Indian capital markets
in the first week of May amid taxation worries.
Though
statements have been issued to allay foreign investors that MAT won't be levied
in countries with whom India has double taxation agreements.Arun Jaitley issued
statements to justify Income tax department's actions to quell tensions between
foreign investors and tax department. Legal stance on the issue is vague as a
result of which two schools of thought have emerged corroborating and
criticizing the tax department's actions.
Indian
markets are on tenterhooks waiting for the final decision to come on the issue.
However, apart from the legal position, we need to look at broader logical and
coherent perspective. India is now more of a liberalized economy intertwined
with global nerves. Hence retractmemt of funds from Indian stock markets will
destabilize the economy and the sweet period will soon come to an end. Rupee
which was enjoying stability till now will become volatile. India will lose its
competitive edge when the the position is so much favourable for India as
India's growth rate is predicted to be higher than China by international
agencies. Moreover, the money will move to Chinese markets especially when
India is facing the dreaded fear of China a shares being enlisted in MSCI
emerging market index .Some will argue that relieving foreign investors of the
tax will imply India ceding to foreign pressure. Well for those remember that -
"Taking one step back sometimes means preparing for a big jump "to
reassess the things for a better and clear perspective.