Days after the government decided to exempt foreign funds from tax on profits earned before April 1, the CBDT on Thursday issued a circular asking its fields officers to keep in abeyance pending assessments and not to recover any outstanding demand.
To resolve a dispute that had shaken investor confidence, Finance Minister Arun Jaitley on Tuesday said the government will not retrospectively impose Minimum Alternate Tax (MAT) on capital gains made by Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs).
The Central Board of Direct Taxes (CBDT) in a circular said it has been decided to carry out appropriate amendment to the Income Tax Act so as to prescribe that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/permanent establishment in India, for the period prior to April 1, 2015.
Jaitley had exempted future profits made by foreign funds from levy of MAT in the Budget for 2015-16. "The field authorities are accordingly advised to take into consideration the above position and keep in abeyance, for the time-being, the pending assessment proceedings in cases of FIIs/FPIs... They are further advised not to pursue the recovery of outstanding demands, if any, in such cases," CBDT said.
The government, Jaitley had said on Tuesday, accepted the recommendations of an expert committee formed to study MAT and will amend the Income Tax Act to clarify that foreign funds will not be subject to MAT.
The confusion over MAT erupted after the tax department sent notices to 68 FIIs demanding Rs 602.83 crore as MAT dues. On Tuesday, Jaitley said the government has accepted the recommendations of the Justice A P Shah panel that there was no basis for levy of such tax for the prior period as well.
The government, he said, decided to amend the Income Tax Act to clarify the issue with regard to levy of MAT on FIIs and in the meantime CBDT field officers will be asked not to pursue cases against FIIs.
CDBT in the circular said a Committee on Direct Tax Matters chaired by Justice A P Shah was constituted to examine the issue of applicability of MAT on FIIs/FPIs for the period prior to April 1, 2015.
"The Committee, which submitted its final report to the Government on August 25, has recommended that section 115JB of the Income-Tax Act, 1961 may be amended to clarify the inapplicability of the provisions of section 115JB on FIIs/FPIs having no permanent establishment/ pace of business in India," it said.
The government, it said, has accepted the recommendation and it has been decided to carry out appropriate amendment in the I-T Act.
Foreign investors have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds. The A P Shah panel in its report summarised that tax certainty should be a desirable goal. "FIIs are mostly open-ended investment funds, which permit their investors to enter and exit daily, based on the NAV of the fund, unanticipated tax liability (or the fear thereof) relating to previous years, which would have to be borne by the current investors, may be a sufficient trigger for the investors to exit," it said.
The sudden change in the interpretation of the applicability of Section 115JB to FIIs/FPIs thus contextualises the need for tax certainty.
In the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD. The panel report said, "FIIs/FPIs normally do not have their own office or employees in India and carry out their decision-making activities outside India.
All their dealings are through independent agents in India." "Additionally, the SEBI Regulations do not mandate their maintenance of books of accounts under Schedule VI of the Companies Act. Thus, FIIs/FPIs are, ordinarily, not covered under Sections 591 to 594 of the Companies Act, 1956," it said.
The Shah panel in its 68 page report said income of FIIs and FPIs were covered Section 115AD of Income Tax Act that was introduced in 1993 when they entered Indian market. The provision provided for tax at a concessional rate.
Applying MAT provision under Section 115JB would lead to FIIs, FPIs being taxed at a higher rate without getting the benefit of set of provisions and MAT credit. Also FIIs and FPIs are not governed by the regulatory regime of the Companies Act and thus Section 115 JB, that provides for levy of MAT on companies, is inapplicable to them.
The report said that the legislative intent was not to cover all kinds of companies, but to limit the definition based on context.