Weighing up the controversies and confusion surrounding the applicability of minimum alternate tax to foreign institutional investors. By Shinoj Koshy and Shikhar Kacker
Foreign institutional investor (FII) celebrations following an amendment exempting them from the purview of minimum alternate tax (MAT) was rather short-lived. With the good came the bad when the revenue authorities retrospectively raised demands in respect of FII profits made prior to 1 April 2015. After months of eminently avoidable confusion and the report of the Justice AP Shah Committee, the government has agreed to resolve the issue through legislative process.
Earlier this year, several FIIs were slapped with notices from the tax authorities subjecting their past incomes to MAT. This retrospective demand for tax took the foreign investor community by surprise, more so since it came from a government that pitched to end “tax terrorism” and provide a stable, predictable and non-adversarial tax regime aimed at reviving India as a preferred investment destination. This article examines the genesis of the MAT regime, and recent controversies and confusion which could perhaps have been avoided.
MAT: genesis and controversies
MAT in its current form was introduced in 1996 to bring “zero tax” companies within the tax net. Indian companies prepare their accounts in accordance with the provisions of the Companies Act but their taxable income is computed in accordance with the Income Tax Act (ITA). Consequently, despite having distributable profits and distributing dividends to shareholders in line with the Companies Act, companies could escape tax liability under the ITA. MAT was introduced to ensure such companies pay a minimum tax of 18.5%.
Shinoj Koshy is a partner at Luthra & Luthra, where Shikhar Kacker is a managing associate.